As filed with the SEC on _____________________. Registration No. 33-86780
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------
FORM S-1
Post-Effective Amendment No. 8
REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OF 1933
PRUCO LIFE INSURANCE COMPANY
in respect of
PRUCO LIFE VARIABLE CONTRACT
REAL PROPERTY ACCOUNT
(Exact Name of Registrant)
c/o PRUCO LIFE INSURANCE COMPANY
213 Washington Street
Newark, New Jersey 07102-2992
(800) 778-2255
(Address and telephone number of principal executive offices)
----------
Thomas C. Castano
Assistant Secretary
Pruco Life Insurance Company
213 Washington Street
Newark, New Jersey 07102-2992
(800) 778-2255
(Name, address, and telephone number of agent for service)
Copy to:
Jeffrey C. Martin
Shea & Gardner
1800 Massachusetts Avenue, N.W.
Washington, D.C. 20036
----------
CROSS REFERENCE SHEET
(as required by Form S-1)
S-1 Item Number and Caption Location
- --------------------------- --------
1. Forepart of the Registration Statement and Outside
Front Cover Page of Prospectus...................... Cover
2. Inside Front and Outside Back Cover Pages of
Prospectus.......................................... Inside Front Cover
3. Summary Information, Risk Factors and Ratio of
Earnings to Fixed Charges........................... Prospectus Cover; Summary; Risk Factors
4. Use of Proceeds..................................... Investment Policies; Current Real Estate-Related
Investments; Management's Discussion and Analysis of
Financial Condition and Results of Operations
5. Determination of Offering Price..................... Not Applicable
6. Dilution............................................ Not Applicable
7. Selling Security Holders............................ Not Applicable
8. Plan of Distribution................................ Distribution of the Contracts
9. Description of Securities to be Registered.......... Prospectus Cover; General Information about Pruco Life
Insurance Company, Pruco Life Variable Contract Real
Property Account, The Prudential Variable Contract Real
Property Partnership, and The Investment Manager; The Real
Property Account's Unavailability to Certain Contracts;
Valuation of Contract Owners' Participating Interests;
Charges; Restrictions on Withdrawals; Restrictions on
Contract Owners' Investment in the Real Property Account
10. Interests of Named Experts and Counsel.............. Not Applicable
11. Information With Respect to the
Registrant.......................................... General Information about Pruco Life Insurance Company,
Pruco Life Variable Contract Real Property Account, The
Prudential Variable Contract Real Property Partnership,
and The Investment Manager; Investment Policies; Current
Real Estate-Related Investments; Management's Discussion
and Analysis of Financial Condition and Results of
Operations; Per Share Investment Income and Capital
Changes; Investment Restrictions; Conflicts of Interest;
Valuation of Contract Owners' Participating Interests;
Financial Statements; Litigation; State Regulation;
Federal Income Tax Considerations
12. Disclosure of Commission Position on Indemni-
fication for Securities Act Liabilities............. Not Applicable
PART I
INFORMATION REQUIRED IN PROSPECTUS
PROSPECTUS
May 1, 2001
PRUCO LIFE
VARIABLE CONTRACT
REAL PROPERTY ACCOUNT
This prospectus is attached to two other prospectuses. The first describes
either a variable annuity contract or a variable life insurance contract (the
"Contract") issued by Pruco Life Insurance Company ("Pruco Life," "us," "we," or
"our"), a stock life insurance company that is a wholly-owned subsidiary of The
Prudential Insurance Company of America ("Prudential"). The second prospectus
describes several investment options available under that variable contract
through The Prudential Series Fund, Inc. (the "Series Fund"). The Series Fund is
registered under the Investment Company Act of 1940 as an open-end, diversified
management investment company. The Series Fund consists of separate investment
portfolios that are mutual funds, each with a different investment policy and
objective.
This prospectus describes the Pruco Life Variable Contract Real Property Account
(the "Real Property Account"), an additional available investment option.
Although it is not a mutual fund, in many ways it is like a mutual fund. Instead
of holding a diversified portfolio of securities, such as stocks or bonds, it
consists mainly of a portfolio of commercial and residential real properties.
Pruco Life determines the price of a "share" or, as we call it, a "participating
interest" in this portfolio of properties, just as it does for the other
investment options. It is based upon our best estimate of the fair market value
of the properties and other assets held in this portfolio. The portion of your
"Contract Fund" (the total amount invested under the Contract) that you allocate
to this investment option will change daily in value, up or down, as the fair
market value of these real properties and other assets change.
The risks of investing in real property are different from the risks of
investing in mutual funds. See RISK FACTORS, page 10. Also, your ability to
withdraw or transfer your investment in this option is not as freely available
as it is for the other investment options. See RESTRICTIONS ON WITHDRAWALS, page
17.
Please read this prospectus and keep it for future reference.
The Securities and Exchange Commission ("SEC") maintains a Web site
(http://www.sec.gov) that contains material incorporated by reference and other
information regarding registrants that file electronically with the SEC.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is accurate or complete. Any representation of the contrary is a
criminal offense.
Pruco Life Insurance Company
213 Washington Street
Newark, New Jersey 07102-2992
Telephone: (800) 778-2255
PRPA-1 Ed 5-2001
PROSPECTUS CONTENTS
Page
PER SHARE INVESTMENT INCOME, CAPITAL CHANGES AND SELECTED RATIOS...............1
SUMMARY........................................................................2
Investment of The Real Property Account Assets..............................2
Investment Objectives.......................................................2
Risk Factors................................................................2
Charges.....................................................................3
Availability to Pruco Life Contracts........................................3
GENERAL INFORMATION ABOUT PRUCO LIFE INSURANCE COMPANY, PRUCO LIFE
VARIABLE CONTRACT REAL PROPERTY ACCOUNT, THE PRUDENTIAL VARIABLE CONTRACT
REAL PROPERTY PARTNERSHIP, AND THE INVESTMENT MANAGER..........................3
Pruco Life Insurance Company................................................3
Pruco Life Variable Contract Real Property Account..........................4
The Prudential Variable Contract Real Property Partnership..................4
The Investment Manager......................................................5
INVESTMENT POLICIES............................................................5
Overview....................................................................5
Investment in Direct Ownership Interests in Real Estate.....................5
Investments in Mortgage Loans...............................................7
Investments in Sale-Leasebacks..............................................8
General Investment and Operating Policies...................................8
CURRENT REAL ESTATE-RELATED INVESTMENTS........................................9
Properties..................................................................9
RISK FACTORS..................................................................10
Liquidity of Investments...................................................10
General Risks of Real Property Investments.................................11
Reliance on The Partners and The Investment Manager........................12
INVESTMENT RESTRICTIONS.......................................................12
CONFLICTS OF INTEREST.........................................................13
THE REAL PROPERTY ACCOUNT'S UNAVAILABILITY TO CERTAIN CONTRACTS...............15
VALUATION OF CONTRACT OWNERS' PARTICIPATING INTERESTS.........................15
BORROWING BY THE PARTNERSHIP..................................................16
CHARGES.......................................................................16
RESTRICTIONS ON WITHDRAWALS...................................................17
RESTRICTIONS ON CONTRACT OWNERS' INVESTMENT IN THE REAL PROPERTY ACCOUNT......18
FEDERAL INCOME TAX CONSIDERATIONS.............................................18
DISTRIBUTION OF THE CONTRACTS.................................................18
STATE REGULATION..............................................................18
ADDITIONAL INFORMATION........................................................19
EXPERTS.......................................................................19
LITIGATION....................................................................19
REPORTS TO CONTRACT OWNERS....................................................19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.........................................................19
FINANCIAL STATEMENTS..........................................................28
FINANCIAL STATEMENTS OF PRUCO LIFE VARIABLE CONTRACT REAL PROPERTY ACCOUNT....A1
FINANCIAL STATEMENTS OF THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY
PARTNERSHIP...................................................................B1
PER SHARE INVESTMENT INCOME, CAPITAL CHANGES AND
SELECTED RATIOS
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
The following information on per share investment income, capital changes and
selected ratios has been provided for your information.
This page should be read in conjunction with the financial statements and notes
thereto of The Prudential Variable Contract Real Property Partnership included
in this prospectus.
01/01/2000 01/01/1999 01/01/1998 01/01/1997 1/1/1996
to to to to to
12/31/2000 12/31/1999 12/31/1998 12/31/1997 12/31/1996
---------- ---------- ---------- ---------- ----------
Revenue from real estate and improvements $ 2.49 $ 2.16 $ 2.07 $ 1.82 $ 1.92
Equity in income of real estate partnership $ 0.09 $ 0.01 $ 0.00* $ 0.04 $ 0.05
Dividend income from real estate investment trusts $ 0.19 $ 0.12 $ 0.06 $ 0.01 $ 0.00
Interest on short-term investments $ 0.14 $ 0.17 $ 0.16 $ 0.20 $ 0.18
---------- ---------- ---------- ---------- ----------
TOTAL INVESTMENT INCOME $ 2.91 $ 2.46 $ 2.29 $ 2.07 $ 2.15
---------- ---------- ---------- ---------- ----------
Investment management fee $ 0.30 $ 0.27 $ 0.25 $ 0.22 $ 0.21
Real estate taxes $ 0.28 $ 0.26 $ 0.20 $ 0.19 $ 0.20
Administrative expense $ 0.27 $ 0.22 $ 0.17 $ 0.20 $ 0.16
Operating expense $ 0.48 $ 0.38 $ 0.34 $ 0.28 $ 0.24
Interest expense $ 0.08 $ 0.02 $ 0.00 $ 0.02 $ 0.04
Minority interest in consolidated partnership $ 0.00* $ 0.00* $ 0.00 $ 0.00 $ 0.00
---------- ---------- ---------- ---------- ----------
TOTAL INVESTMENT EXPENSES $ 1.41 $ 1.15 $ 0.96 $ 0.91 $ 0.85
---------- ---------- ---------- ---------- ----------
NET INVESTMENT INCOME $ 1.50 $ 1.31 $ 1.33 $ 1.16 $ 1.30
---------- ---------- ---------- ---------- ----------
Net realized gain (loss) on real estate investments sold
or converted $ 0.29 $ (0.00)* $ 0.26 $ 0.03 $ (0.13)
---------- ---------- ---------- ---------- ----------
Change in unrealized gain (loss) on real estate investments $ 0.25 $ (0.72) $ 0.15 $ 0.69 $ (0.27)
Minority interest in unrealized gain (loss) on investments $ (0.05) $ (0.00)* $ 0.00 $ 0.00 $ 0.00
---------- ---------- ---------- ---------- ----------
Net unrealized gain (loss) on real estate investments $ 0.20 $ (0.72) $ 0.15 $ 0.69 $ (0.27)
---------- ---------- ---------- ---------- ----------
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS $ 0.49 $ (0.72) $ 0.41 $ 0.72 $ (0.40)
========== ========== ========== ========== ==========
Net change in share value $ 1.88 $ 0.59 $ 1.74 $ 1.88 $ 0.90
Share value at beginning of period $ 20.86 $ 20.27 $ 18.53 $ 16.65 $ 15.75
---------- ---------- ---------- ---------- ----------
Share value at end of period $ 22.74 $ 20.86 $ 20.27 $ 18.53 $ 16.65
========== ========== ========== ========== ==========
Ratio of expenses to average net assets 6.07% 5.33% 4.99% 5.16% 5.26%
Ratio of net investment income to average net assets 6.49% 6.12% 6.97% 6.66% 8.01%
Number of shares outstanding at
end of period (000's) 9,076 10,079 11,848 11,848 11,848
All calculations are based on average month-end shares outstanding where
applicable.
Per share information presented herein is shown on a basis consistent with the
financial statements as discussed in Note 2J on page B10.
* Per Share amount less than $0.01 (rounded)
1-Real Property
SUMMARY
This Summary provides a brief overview of the more significant aspects of the
Real Property Account. We provide further detail in the subsequent sections of
this prospectus.
The Real Property Account is a separate account of Pruco Life Insurance Company
("Pruco Life") created pursuant to Arizona insurance law. Under that law, the
assets of the Real Property Account are not chargeable with liabilities arising
out of any other business of Pruco Life. Owners of certain variable life
insurance and variable annuity contracts issued by Pruco Life may allocate a
portion of their net premiums or purchase payments, or transfer a portion of
their Contract Fund, to the Real Property Account. Values and benefits under the
Contracts will thereafter reflect the investment experience of the Real Property
Account. Contract owners, not Pruco Life, bear the risks and rewards of the
investment performance of the Real Property Account to the extent of the
Contract owner's Contract Fund invested in the Real Property Account. This
prospectus is attached to and should be read in conjunction with the prospectus
for the Contract you selected.
Investment of The Real Property Account Assets
The Real Property Account assets are invested primarily in income-producing real
estate through The Prudential Variable Contract Real Property Partnership (the
"Partnership") which is a general partnership that was established by Prudential
and two of its wholly-owned subsidiaries, Pruco Life and Pruco Life Insurance
Company of New Jersey ("Pruco Life of New Jersey"). See The Prudential Variable
Contract Real Property Partnership, page 4. Prudential, the parent of Pruco Life
and a mutual insurance company organized under the laws of New Jersey, is the
investment manager of the Partnership. See The Investment Manager, page 5. The
Partnership invests at least 65% of its assets in direct ownership interests in:
1. income-producing real estate;
2. participating mortgage loans (mortgages providing for participation in
the revenues generated by, or the appreciation of, the underlying
property, or both) originated for the Partnership; and
3. real property sale-leasebacks negotiated by Prudential on behalf of
the Partnership.
The large majority of these real estate investments will be in direct ownership
interests in income producing real estate, such as office buildings, shopping
centers, apartments, industrial properties or hotels. The Partnership may also
invest up to 5% of its assets in direct ownership interests in agricultural
land. Approximately 10% of the Partnership's assets will be held in cash or
invested in liquid instruments and securities. The remainder of the
Partnership's assets may be invested in other types of real estate related
investments, including non-participating mortgage loans and real estate
investment trusts.
Investment Objectives
The investment objectives of the Partnership are to:
1. preserve and protect the Partnership's capital;
2. compound income by reinvesting investment cash flow; and
3. over time, increase the income amount through appreciation in the
value of permitted investments and, to a lesser extent, through
mortgage loans and sale-leaseback transactions.
There is no assurance that the Partnership's objectives will be attained. See
INVESTMENT POLICIES, page 5.
Risk Factors
Investment in the Real Property Account, and thereby, participation in the
investment experience of the Partnership, involves significant risks. See RISK
FACTORS, page 10. These include the risk of fluctuating real estate values and
the risk that the appraised or estimated values of the Partnership's real
property investments will not be realized upon their disposition. Many of the
Partnership's real estate investments will not be quickly convertible into cash.
Therefore, the Real Property Account should be viewed as a long-term investment.
See RESTRICTIONS ON WITHDRAWALS, page 17.
Pruco Life has taken steps to ensure that the Real Property Account and
Partnership will be sufficiently liquid to satisfy all withdrawal or loan
requests promptly (within seven days), see Liquidity of Investments, page 10.
Prudential's
2-Real Property
management of the Partnership is subject to certain conflicts of interest,
including the possible acquisition of properties from affiliates. See CONFLICTS
OF INTEREST, page 13.
Charges
Prudential charges the Partnership a daily investment management fee which
amounts to 1.25% per year of the average daily gross assets of the Partnership.
The Partnership also compensates Prudential for providing certain accounting and
administrative services. See CHARGES, page 16. The portion of your Contract Fund
allocated to the Real Property Account is subject to the same Contract charges
as the portion of your Contract Fund allocated to The Prudential Series Fund,
Inc. (the "Series Fund"). The Series Fund is the underlying funding vehicle for
the other variable investment options available to Contract owners. You should
read the Contract prospectus for a description of those charges.
Availability to Pruco Life Contracts
The Real Property Account is currently available to purchasers of Pruco Life's
Variable Appreciable Life(R) Insurance Contracts, Variable Life Insurance
Contracts, Discovery(R) Life Plus Contracts, and Discovery(R) Plus Contracts. It
is not available on Contracts that are purchased in connection with IRAs,
Section 403(b) annuities, and other tax-qualified plans, that are subject to the
Employee Retirement Income Security Act of 1974 ("ERISA") or to the prohibited
transaction excise tax provisions of the Internal Revenue Code. See THE REAL
PROPERTY ACCOUNT'S UNAVAILABILITY TO CERTAIN CONTRACTS, page 15. For example, a
Variable Appreciable Life Contract owner who elects to invest part of his or her
net premiums in the Pruco Life Variable Appreciable Account, a separate account
of Pruco Life registered as a unit investment trust under the Investment Company
Act of 1940, and part in the Real Property Account, will be subject to the same:
(1) monthly sales load charges; (2) risk charges; (3) administrative charges;
(4) insurance charges; and (5) contingent deferred sales charges without regard
to what portion is invested in the Pruco Life Variable Appreciable Account and
what portion is invested in the Real Property Account. The Real Property Account
has established different subaccounts, relating to the different types of
variable Contracts that may participate in the Real Property Account. These
subaccounts provide the mechanism and maintain the records whereby these
different Contract charges are made.
This prospectus may only be offered in jurisdictions in which the offering is
lawful. No person is authorized to make any representations in connection with
this offering other than those contained in this prospectus.
GENERAL INFORMATION ABOUT PRUCO LIFE INSURANCE
COMPANY, PRUCO LIFE VARIABLE CONTRACT REAL
PROPERTY ACCOUNT, THE PRUDENTIAL VARIABLE
CONTRACT REAL PROPERTY PARTNERSHIP, AND THE
INVESTMENT MANAGER
Pruco Life Insurance Company
Pruco Life Insurance Company ("Pruco Life") is a stock life insurance company,
organized in 1971 under the laws of the State of Arizona. It is licensed to sell
life insurance and annuities in the District of Columbia, Guam, and in all
states except New York. These Contracts are not offered in any state in which
the necessary approvals have not yet been obtained.
Pruco Life is a wholly-owned subsidiary of Prudential, a mutual insurance
company founded in 1875 under the laws of the State of New Jersey. Prudential is
currently pursuing reorganizing itself into a stock life insurance company
through a process known as "demutualization". On July 1, 1998, legislation was
enacted in New Jersey that would permit this conversion to occur and that
specified the process for conversion. On December 15, 2000, the Board of
Directors adopted a plan of reorganization pursuant to that legislation and
authorized management to submit an application to the New Jersey Commissioner of
Banking and Insurance for approval of the plan. The application was submitted on
March 14, 2001. However, demutualization is a complex process and a number of
additional steps must be taken before the demutualization can occur, including a
public hearing, voting by qualified policyholders, and regulatory approval.
Prudential is planning on completing this process in 2001, but there is no
certainty that the demutualization will be completed in this timeframe or that
the necessary approvals will be obtained. Also it is possible that after careful
review, Prudential could decide not to demutualize or could decide to delay its
plans. As a general rule, the plan of reorganization provides that, in order for
policies or contracts to be eligible for compensation in the
3-Real Property
demutualization, they must have been in force on the date the Board of Directors
adopted the plan, December 15, 2000. If demutualization does occur, all the
guaranteed benefits described in your policy or contract would stay the same.
Pruco Life's consolidated financial statements appear in either the attached
Contract prospectus or in the statement of additional information for the
Contract prospectus, which is available upon request.
Pruco Life Variable Contract Real Property Account
The Pruco Life Variable Contract Real Property Account (the "Real Property
Account") was established on August 27, 1986 under Arizona law as a separate
investment account. The Account meets the definition of a "separate account"
under the federal securities laws. The Real Property Account holds assets that
are separated from all of Pruco Life's other assets. The Real Property Account
is used only to support the variable benefits payable under the Contracts that
are funded by the real estate investment option.
The Contract obligations to Contract owners and beneficiaries are general
corporate obligations of Pruco Life. Pruco Life is also the legal owner of the
Real Property Account assets. Pruco Life will maintain assets in the Real
Property Account with a total market value at least equal to the amounts
credited under the real estate option to all the Contracts participating in the
Real Property Account. These assets may not be charged with liabilities which
arise from any other business that Pruco Life conducts. In addition to these
assets, the Real Property Account's assets may include funds contributed by
Pruco Life, and reflect any accumulations of the charges Pruco Life makes
against the Real Property Account. See Valuation of Contract Owner's
Participating Interests, page 15.
Pruco Life will bear the risks and rewards of the Real Property Account's
investment experience to the extent of its investment in the Real Property
Account. Pruco Life may withdraw or redeem its investment in the Real Property
Account at any time. We will not make any such redemption if it will have a
materially adverse impact on the Real Property Account. Accumulations of charges
will be withdrawn on a regular basis.
Unlike the other separate accounts funding the Contracts, the Real Property
Account is not registered with the Securities and Exchange Commission ("SEC")
under the Investment Company Act of 1940 as an investment company. For state law
purposes, the Real Property Account is treated as a part or division of Pruco
Life. Contract owners have no voting rights with respect to the Real Property
Account. The Real Property Account is under the control and management of Pruco
Life. The Board of Directors and officers of Pruco Life are responsible for the
management of the Real Property Account. No salaries of Pruco Life personnel are
paid by the Real Property Account. Information regarding the directors and
officers of Pruco Life is contained in the attached prospectus for the Contract.
The financial statements of the Real Property Account begin on page A1.
The Prudential Variable Contract Real Property Partnership
All amounts allocated to the Real Property Account are invested through The
Prudential Variable Contract Real Property Partnership (the "Partnership"), a
general partnership organized under New Jersey law on April 29, 1988. The only
partners in the Partnership (collectively, the "Partners") are Prudential and
two of its wholly-owned subsidiaries, Pruco Life and Pruco Life of New Jersey.
The Partnership was established so the assets allocated to the real estate
investment options under certain variable life insurance and variable annuity
contracts issued by these three companies could be invested in a commingled
pool. This was done to provide greater diversification of investments and lower
transaction costs than would be possible if the assets were separately invested
by each company. All amounts allocated to the Real Property Account are
contributed by Pruco Life to the Partnership. Pruco Life's general partnership
interest in the Partnership is held in the Real Property Account.
The initial contributions to the Partnership were made on April 29, 1988.
Prudential contributed $100,000 in cash to the Partnership; Pruco Life of New
Jersey contributed $100,000 in cash to the Partnership; and Pruco Life
contributed the real estate and other assets held in its real estate separate
account, which had been actively investing in real estate for more than a year.
Those assets had an estimated market value of $91,538,737 on that date. Each
Partner is entitled to its respective proportionate share of all income, gains,
and losses of the Partnership.
The Partnership assets are valued on each business day. The value of each
Partner's interest will fluctuate with the investment performance of the
Partnership. In addition, the Partners' interests are proportionately
readjusted, at the current value, on each day when a Partner makes a
contribution to, or withdrawal from, the Partnership. When you choose to
allocate a portion of your net premiums or purchase payments, or transfer a
portion of your Contract Fund, to the Real Property Account, Pruco Life will
contribute that amount to the Partnership as a capital contribution. It will
correspondingly increase the Real Property Account's interest in the
Partnership. Values and benefits under the
4-Real Property
Contract will thereafter vary with the performance of the Partnership's
investments. For more information on how the value of your interest in the Real
Property Account and the value of the Partnership's investments are calculated,
see VALUATION OF CONTRACT OWNERS' PARTICIPATING INTERESTS, page 15.
Contract owners have no voting rights with respect to the Partnership
operations. The financial statements of the Partnership begin on page B1.
The Investment Manager
The Partnership has retained Prudential to act as investment manager of the
Partnership. Prudential, on behalf of its general account, separate accounts,
and other third party accounts, is one of the largest real estate investors in
North America.
Currently, Prudential directly and through affiliates invests in and manages
real estate equities and mortgages for its general account and for separate
accounts and other third party accounts. Prudential and its affiliates also
participate in real estate ventures through public and private partnerships. As
of December 31, 2000, Prudential owned or controlled $29.8 billion of net
domestic real estate mortgages and equities of which $18.6 billion is in the
general account and $11.2 billion is in separate accounts and other third party
accounts. Statement value for general account assets is recorded at depreciated
cost and for assets in separate accounts and other third party accounts at
market value. For a discussion of how the Partnership's real estate-related
investments are valued, see VALUATION OF CONTRACT OWNERS' PARTICIPATING
INTERESTS, page 15.
Prudential has organized its real estate activities into separate business units
within Prudential's Global Asset Management Group. Prudential Real Estate
Investors (PREI) is the unit responsible for the investments of the Real
Property Partnership. PREI's investment staff is responsible for both general
account and third party account real estate investment management activities.
PREI provides investment management services on a domestic basis and also acts
as part of a global team providing these services to institutional investors
worldwide. PREI is headquartered in Parsippany, New Jersey and has 4 field
offices across the United States. As of December 31, 2000, PREI had under
management approximately 18.6 million net rentable square feet of office real
estate, 20.8 million net rentable square feet of industrial real estate, 10.4
million net rentable square feet of retail real estate, 5,597 hotel rooms, and
24,566 multifamily residential units.
Various divisions of Prudential may provide PREI with services that may be
required in connection with the Partnership's investment management agreement.
The mortgage operation currently manages a portfolio of mortgage loans totaling
approximately $32.4 billion.
INVESTMENT POLICIES
Overview
The Partnership has an investment policy of investing at least 65% of its assets
in direct ownership interests in income-producing real estate, participating
mortgage loans originated for the Partnership, and real property sale-leasebacks
negotiated by Prudential on behalf of the Partnership. It is expected that the
largest portion of these real estate investments will be in direct ownership
interests (including fee interests, leasehold interests, and interests in
entities holding such interests) in income-producing real estate. The
Partnership may also invest up to 5% of its assets in direct ownership interests
in agricultural land. Approximately 10% of the Partnership's assets will
ordinarily be held in cash or invested in liquid instruments and securities,
although the Partners reserve discretion to increase this amount to meet
partnership liquidity requirements, for example. The remainder of the
partnership assets may be invested in other types of real estate-related
investments, including non-participating mortgage loans, real estate limited
partnerships, limited liability companies, real estate investment trusts, and
other vehicles whose underlying investment is in real estate.
Investment in Direct Ownership Interests in Real Estate
Acquisition. The Partnership's principal investment policy involves acquiring
direct ownership interests in existing (including newly constructed)
income-producing real estate, including office buildings, shopping centers,
apartment buildings, industrial properties, and hotels. The Partnership may also
invest up to 5% of its assets in direct ownership interests in agricultural
land. Property acquisitions will generally be carried out by the real estate
acquisition offices in PREI's network of field offices located in Parsippany,
New Jersey, Atlanta, Georgia, Chicago, Illinois and Los Angeles,
5-Real Property
California. A field office or an affiliate of Prudential supervises the
management of properties in all of Prudential's accounts.
Proposals to acquire properties for the Partnership are usually originated by a
field office. They are reviewed and approved by the Investment Management
Committee of PREI. Depending upon the size of the acquisition and other factors,
a proposed real estate investment may also be submitted for review to the
Investment Committee of the Board of Directors of Prudential.
Although percentage limitations on the type and location of properties that may
be acquired by the Partnership have not been established, the Partnership plans
to diversify its investments through the type of property acquired and its
geographic location. The Partnership's investments will be maintained to meet
the Internal Revenue Code diversification requirements. See General Investment
and Operating Policies, page 8.
In order for the Partnership to meet its stated objectives, it will have to
acquire properties that generate more cash than needed to pay its gross
operating expenses. To do this, a substantial portion of the Partnership's
assets will be invested in properties with operating histories that include
established rent and expense schedules. However, the Partnership may also
acquire recently constructed properties that may be subject to agreements with
sellers providing for certain minimum levels of income. Upon the expiration of
or default under these agreements, there is no assurance that the Partnership
will maintain the level of operating income necessary to produce the return it
was previously experiencing. The Partnership may purchase real property from
Prudential or its affiliates under certain conditions. See CONFLICTS OF
INTEREST, page 13.
The property acquired by the Partnership is usually real estate which is ready
for use. Accordingly, the Partnership is not usually subject to the development
or construction risks inherent in the purchase of unimproved real estate. From
time to time, however, the Partnership may invest in a developmental real estate
project that is consistent with the Partnership's objectives. The Partnership
will then be subject to those risks.
The Partnership will often own the entire fee interest in an acquired property,
but it may also hold other direct ownership interests. These include, but are
not limited to, partnership interests, limited liability company interests,
leaseholds, and tenancies in common.
Property Management and Leasing Services. The Partnership usually retains a
management company operating in the area of a property to perform local property
management services. A field office or other affiliate of Prudential will
usually: (1) supervise and monitor the performance of the local management
company; (2) determine and establish the required accounting information to be
supplied; (3) periodically inspect the property; (4) review and approve property
operating budgets; and (5) review actual operations to ensure compliance with
budgets. In addition to day-to-day management of the property, the local
management company will have responsibility for: (1) supervision of any on-site
personnel; (2) negotiation of maintenance and service contracts; (3) major
repair advice; (4) replacements and capital improvements; (5) the review of
market conditions to recommend rent schedule changes; and (6) creation of
marketing and advertising programs to obtain and maintain good occupancy rates
by responsible tenants. The local management company fees will reduce the cash
flow from the property to the Partnership.
The Partnership usually retains a leasing company to perform leasing services on
any property with actual or projected vacancies. The leasing company will
coordinate with the property management company to provide marketing and leasing
services for the property. When the property management company is qualified to
handle leasing, it may also be hired to provide leasing services. Leasing
commissions and expenses will reduce the cash flow from the property to the
Partnership.
Prudential may, on behalf of the Partnership, hire an affiliate to perform
property management or leasing services. The affiliate's services must be
provided on terms competitive with unaffiliated entities performing similar
services in the same geographic area. See CONFLICTS OF INTEREST, page 13.
Annually, the field office which oversees the management of each property owned
by the Partnership will, together with the local property management firm,
develop a business plan and budget for each property. It will consider, among
other things, the projected rollover of individual leases, necessary capital
expenditures and any expansion or modification of the use of the property. The
approval of an officer of PREI is required. The field office will also
periodically report the operating performance of the property to PREI.
6-Real Property
Investments in Mortgage Loans
Types of Mortgage Loans
The Partnership is authorized to invest in mortgage loans, including
conventional mortgage loans that may pay fixed or variable rates of interest and
mortgage loans that have a "participation" (as defined below). The Partnership
will not make mortgage loans to Prudential affiliates.
The Partnership intends to give mortgage loans on: (1) commercial properties
(such as office buildings, shopping centers, hotels, industrial properties, and
office showrooms); (2) agricultural properties; and (3) residential properties
(such as garden apartment complexes and high-rise apartment buildings). These
loans are usually secured by properties with income-producing potential based on
historical or projected data. Usually, they are not personal obligations of the
borrower and are not insured or guaranteed.
1. First Mortgage Loans. The Partnership will primarily make first mortgage
loans secured by mortgages on existing income-producing property. These loans
may provide for interest-only payments and a balloon payment at maturity.
2. Wraparound Mortgage Loans. The Partnership also may make wraparound mortgage
loans on income-producing properties which are already mortgaged to unaffiliated
entities. A wraparound mortgage loan is a mortgage with a principal amount equal
to the outstanding balance of the prior existing mortgage plus the amount to be
advanced by the lender under the wraparound mortgage loan, thereby providing the
property owner with additional funds without disturbing the existing loan. The
terms of wraparound mortgage loans made by the Partnership require the borrower
to make all principal and interest payments on the underlying loan to the
Partnership, which will then pay the holder of the prior loan. Because the
existing first mortgage loan is preserved, the lien of the wraparound mortgage
loan is junior to it. The Partnership will make wraparound mortgage loans only
in states where local applicable foreclosure laws permit a lender, in the event
of the borrower's default, to obtain possession of the property which secures
the loan.
3. Junior Mortgage Loans. The Partnership may also invest in other junior
mortgage loans. Junior mortgage loans will be secured by mortgages which are
subordinate to one or more prior liens on the real property. They will
generally, but not in all cases, provide for repayment in full prior to the end
of the amortization period of the senior mortgages. Recourse on such loans will
include the real property encumbered by the Partnership's mortgage and may also
include other collateral or personal guarantees by the borrower.
The Partnership will generally make junior or wraparound mortgage loans only if
the senior mortgage, when combined with the amount of the Partnership's mortgage
loan, would not exceed the maximum amount which the Partnership would be willing
to commit to a first mortgage loan and only under such circumstances and on such
property as to which the Partnership would otherwise make a first mortgage loan.
4. Participations. The Partnership may make mortgage loans which, in addition to
charging a base rate of interest, will include provisions permitting the
Partnership to participate (a "participation") in the economic benefits of the
underlying property. The Partnership would receive a percentage of: (1) the
gross or net revenues from the property operations; and/or (2) the increase in
the property value realized by the borrower, such as through sale or refinancing
of the property. These arrangements may also grant the Partnership an option to
acquire the property or an undivided interest in the property securing the loan.
When the Partnership negotiates the right to receive additional interest in the
form of a percentage of the gross revenues or otherwise, the fixed cash return
to the Partnership from that investment will generally be less than would
otherwise be the case. It is expected that the Partnership will be entitled to
percentage participations when the gross or net revenues from the property
operations exceed a certain base amount. This base amount may be adjusted if
real estate taxes or similar charges are increased. The form and extent of the
additional interest that the Partnership receives will vary with each
transaction depending on: (1) the equity investment of the owner or developer of
the property; (2) other financing or credit obtained by the owner or developer;
(3) the fixed base interest rate on the mortgage loan by the Partnership; (4)
any other security arrangement; (5) the cash flow and pro forma cash flow from
the property; and (6) market conditions.
The Partnership intends to use this additional interest as a hedge against
inflation. It assumes that as prices increase in the economy, the rental prices
on properties, such as shopping centers or office buildings, will increase and
there should be a corresponding increase in the property value. There is no
assurance that additional interest or increased property values will be
received. In that event, the Partnership will be entitled to receive only the
fixed portion of its return.
7-Real Property
Standards for Mortgage Loan Investments
In making mortgage loans, the investment manager will consider relevant real
property and financial factors, including: (1) the location, condition, and use
of the underlying property; (2) its operating history; (3) its future
income-producing capacity; and (4) the quality, experience, and creditworthiness
of the unaffiliated borrower.
Before the Partnership makes a mortgage loan, the investment manager analyzes
the fair market value of the underlying real estate. In general, the amount of
each mortgage loan made by the Partnership will not exceed, when added to the
amount of any existing indebtedness, 80% of the estimated or appraised value of
the property mortgaged.
Dealing With Outstanding Loans
The Partnership may sell its mortgage loans prior to maturity if it is deemed
advisable by the investment manager and consistent with the Partnership's
investment objectives. The investment manager may also: (1) extend the maturity
of any mortgage loan made by the Partnership; (2) consent to a sale of the
property subject to a mortgage loan or finance the purchase of a property by
making a new mortgage loan in connection with the sale of a property (either
with or without requiring the repayment of the mortgage loan); (3) renegotiate
the terms of a mortgage loan; and (4) otherwise deal with the mortgage loans of
the Partnership.
Investments in Sale-Leasebacks
A portion of the Partnership's investments may consist of real property
sale-leaseback transactions ("leasebacks"). In this type of transaction, the
Partnership will purchase land and income-producing improvements on the land and
simultaneously lease the land and improvements, generally to the seller, under a
long-term lease. Leasebacks may be for very long periods and may provide for
increasing payments from the lessee.
Under the terms of the leaseback, the tenant will operate, or provide for the
operation of, the property and generally be responsible for the payment of all
costs, including: (1) taxes; (2) mortgage debt service; (3) maintenance and
repair of the improvements; and (4) insurance. In some cases, the Partnership
may also grant the lessee an option to acquire the land and improvements from
the Partnership after a period of years. The option exercise price would be
based on the fair market value of the property, as encumbered by the lease, the
increase in the gross revenues from the property or other objective criteria
reflecting the increased value of the property.
In some leaseback transactions, the Partnership may only purchase the land under
an income-producing building and lease the land to the building owner. In such
cases, the Partnership may seek, in addition to base rents in its leasebacks,
participations in the gross revenues from the building in a form such as a
percentage of the gross revenues of the lessee above a base amount (which may be
adjusted if real property taxes increase or for other events). The Partnership
may invest in leasebacks which are subordinate to other interests in the land,
buildings, and improvements, such as a first mortgage, other mortgage, or lien.
In those situations, the Partnership's leaseback interest will be subject to
greater risks.
The Partnership will only acquire a property for a leaseback transaction if the
purchase price is equal to not more than 100% of the estimated or appraised
property value. The Partnership may dispose of its leasebacks when deemed
advisable by the investment manager and consistent with the Partnership's
investment objectives.
General Investment and Operating Policies
The Partnership does not intend to invest in any direct ownership interests in
properties, mortgage loans or leasebacks in order to make short-term profits
from their sale, although in exceptional cases, the investment manager may
decide to do so in the best interests of the Partnership. The Partnership may
dispose of its investments whenever necessary to meet its cash requirements or
when it is deemed to be desirable by the investment manager because of market
conditions or otherwise. The Partnership will reinvest any proceeds from the
disposition of assets (and any cash flow from operations) which are not
necessary for the Partnership's operations and which are not withdrawn by the
Partners in order to make distributions to investors pursuant to the variable
contracts issued by the Partners, or to Prudential to return its equity
interests pursuant to this prospectus. The proceeds will be reinvested in
investments consistent with the Partnership's investment objectives and
policies.
In making investments in properties, mortgage loans, leasebacks or other real
estate investments, the Partnership will rely on the investment manager's
analysis of the investment and will not receive an independent appraisal prior
to acquisition. The Partnership expects, however, that all the properties it
owns, and most mortgage loans it holds, will be appraised or valued annually by
an independent appraiser who is a member of a nationally recognized society of
8-Real Property
appraisers. Each appraisal will be maintained in the Partnership records for at
least five years. It should be noted that appraised values are opinions and, as
such, may not represent the true worth or realizable value of the property being
appraised.
The Partnership usually purchases properties on an unleveraged basis. The
properties acquired will typically be free and clear of mortgage debt
immediately after their acquisition. The Partnership may, however, acquire
properties subject to existing mortgage loans. In addition, the Partnership may
mortgage or acquire properties partly with the proceeds of purchase money
mortgage loans, up to 80% of the property value. Although this is not usually
done, the Partnership may do so if the investment manager decides that it is
consistent with its investment objectives. When the Partnership mortgages its
properties, it bears the expense of mortgage payments. See BORROWING BY THE
PARTNERSHIP, page 16.
The Partnership may also invest a portion of its assets in non-participating
mortgage loans, real estate limited partnerships, limited liability companies,
real estate investment trusts, and other vehicles whose underlying investment is
in real estate.
The Partnership's investments will be maintained in order to meet the
diversification requirements set forth in regulations under the Internal Revenue
Code (the "Code") relating to the investments of variable life insurance and
variable annuity separate accounts. In order to meet the diversification
requirements under the regulations, the Partnership will meet the following
test: (1) no more than 55% of the assets will be invested in any one investment;
(2) no more than 70% of the assets will be invested in any two investments; (3)
no more than 80% of the assets will be invested in any three investments; and
(4) no more than 90% of the assets will be invested in any four investments. All
interests in the same real property project are treated as a single investment.
The Partnership must meet the above test within 30 days of the end of each
calendar quarter. To comply with the diversification requirements of the State
of Arizona, the Partnership will limit additional investments in any one parcel
or related parcels to an amount not exceeding 10% of Partnership's gross assets,
as of the prior fiscal year end.
In managing the assets of the Partnership, Prudential will use its discretion in
determining whether to foreclose on defaulting borrowers or to evict defaulting
tenants. Prudential will decide which course of action is in the best interests
of the Partnership in maintaining the value of the investment.
Property management services are usually required for the Partnership's
investments in properties which are owned and operated by the Partnership but
usually will not be needed for mortgage loans owned by the Partnership, except
for mortgage servicing. It is possible, however, that these services will be
necessary or desirable in exercising default remedies under a foreclosure on a
mortgage loan. Prudential may engage, on behalf of the Partnership, affiliated
or unaffiliated entities to provide these additional services to the
Partnership. Prudential may engage its affiliates to provide property
management, property development services, loan servicing or other services if
and only if the fees paid to an affiliate do not exceed the amount that would be
paid to an independent party for similar services rendered in the same
geographic area. See CONFLICTS OF INTEREST, page 13.
Prudential will manage the Partnership so that the Real Property Account will
not be subject to registration under the Investment Company Act of 1940. This
requires monitoring the proportion of the Partnership's assets to be placed in
various investments.
CURRENT REAL ESTATE-RELATED INVESTMENTS
The current principal real estate-related investments held by the Partnership
are described below. Many of these investments were originated by, and
previously held in, The Prudential Real Property Account of Pruco Life Insurance
Company (the "Pruco Life Account"), a separate account established to fund the
real estate investment option under variable contracts issued by Pruco Life.
Prior to the formation of the Partnership, the Pruco Life Account followed the
same investment policies as those followed by the Partnership. Pruco Life
contributed the assets held in the Pruco Life Account to the Partnership as its
initial capital contribution to the Partnership.
Properties
The Partnership owns the following properties as of December 31, 2000.
1. Office Properties
The Partnership owns office properties in Lisle and Oakbrook Terrace,
Illinois; Brentwood, Tennessee; and Beaverton, Oregon. Total square footage
owned is approximately 481,000 of which 77% or 373,000 square feet
9-Real Property
are leased between 1 and 10 years. The Partnership's Morristown, New Jersey
property, which had approximately 85,000 square feet, was sold on October
26, 2000.
2. Apartment Complexes
The Partnership owns apartment complexes in Atlanta, Georgia and Raleigh,
North Carolina. There are a total of 490 apartment units available of which
95% or 465 units are leased. Leases range from month-to-month to one year.
In addition, on September 17, 1999, the Partnership invested in an
apartment complex located in Jacksonville, FL. This joint venture
investment has a total of 458 units available of which 416 units or 91% are
occupied. Leases range from month-to-month to one year.
3. Retail Property
The Partnership owns a shopping center in Roswell, Georgia. The property is
located approximately 22 miles north of downtown Atlanta on a 30 acre site.
The square footage is approximately 316,000 of which 96% or 304,000 square
feet is leased between 1 and 10 years. On September 30, 1999 the
Partnership invested in a retail portfolio located in the Kansas City, MO
and KS areas. This joint venture investment has approximately 488,000 of
net rentable square feet of which 91% or 444,000 square feet is leased
between 1 and 20 years.
4. Industrial Properties
The Partnership owns warehouses and distribution centers in Bolingbrook,
Illinois; Aurora, Colorado; and Salt Lake City, Utah. Total square footage
owned is approximately 685,000 of which 72% or 491,000 square feet are
leased between 2 and 10 years.
5. Investment in Real Estate Trust
The Partnership owned 386,208 shares of ProLogis REIT. ProLogis is a self
administered and self-managed equity real estate investment trust engaged
in owning, operating, marketing and leasing high quality, industrial
distribution facilities throughout North America and Europe, and developing
master-planned distribution parks and corporate distribution facilities.
The Partnership liquidated its entire investment in ProLogis REIT shares
during June 2000. The Partnership also owns investments in various other
REIT stocks. The Partnership made an additional investment of $8,000,000 in
various other REIT stocks in November 2000.
RISK FACTORS
There are certain risk factors that you should consider before allocating a
portion of your net premiums or purchase payments, or transferring a portion of
your Contract Fund, to the Real Property Account. These include valuation risks,
(see VALUATION OF CONTRACT OWNERS' PARTICIPATING INTERESTS, page 15), certain
conflicts of interest, (see CONFLICTS OF INTEREST, page 13), as well as the
following risks:
Liquidity of Investments
Because the Real Property Account will, through the Partnership, invest
primarily in real estate, its assets will not be as liquid as the investments
generally made by separate accounts of life insurance companies funding variable
life insurance and variable annuity contracts. The Partnership will, however,
hold approximately 10% of its assets in cash and invested in liquid securities.
The primary purposes for such investments are to meet the expenses involved in
the operation of the Partnership and to allow it to have sufficient liquid
assets to meet any requests for withdrawals from the Real Property Account. Such
withdrawals would be made in order to meet requested or required payments under
the Contracts. The Partnership may also borrow funds to meet liquidity needs.
See BORROWING BY THE PARTNERSHIP, page 16.
Pruco Life and Prudential have taken steps to ensure that the Partnership will
be liquid enough to meet all anticipated withdrawals by the Partners to meet the
separate accounts' liquidity requirements. It is possible that the Partnership
may need to dispose of a real property or mortgage loan investment promptly in
order to meet such withdrawal requests.
10-Real Property
General Risks of Real Property Investments
By participating in the Real Property Account and thereby in the investment
performance of the Partnership, you will be subject to many of the risks of real
property investments. These include:
1. Risks of Ownership of Real Properties. The Partnership will be subject to the
risks inherent in the ownership of real property such as fluctuations in
occupancy rates and operating expenses and variations in rental schedules. It
may be adversely affected by general and local economic conditions, the supply
of and demand for properties of the type in which the Partnership invests,
zoning laws, and real property tax rates. Operation of property in which the
Partnership invests will primarily involve rental of that property to tenants.
The financial failure of a tenant resulting in the termination of their lease
might cause a reduction in the cash flow to the Partnership. If a lease is
terminated, there is no assurance that the Partnership will be able to find a
new tenant for the property on terms as favorable to the Partnership as those
from the prior tenant. Investments in hotels are subject to additional risk from
the daily turnover and fluctuating occupancy rates of hotel rooms and the
absence of long-term tenants.
The Partnership's properties will also be subject to the risk of loss due to
certain types of property damage (such as from nuclear power plant accidents and
wars) which are either uninsurable or not economically insurable.
2. Risks of Mortgage Loan Investments. The Partnership's mortgage loan
investments will be subject to the risk of default by the borrowers. In this
event the Partnership would have the added responsibility of foreclosing on or
pursuing other remedies on the underlying properties to protect the value of its
mortgage loans. A borrower's ability to meet its mortgage loan payments will be
dependent upon the risks generally inherent to the ownership of real property.
Mortgage loans made by the Partnership will generally not be personal
obligations of the borrowers. The Partnership will only rely on the value of the
underlying property for its security. Mechanics', materialmen's, government, and
other liens may have or obtain priority over the Partnership's security interest
in the property.
In addition, the Partnership's mortgage loan investments will be subject to
prepayment risks. If the terms of the mortgage loans permit, mortgagors may
prepay the loans, thus possibly changing the Partnership's return.
Junior mortgage loans (including wraparound mortgage loans) will be subject to
greater risk than first mortgage loans, since they will be subordinate to liens
of senior mortgagees. In the event a default occurs on a senior mortgage, the
Partnership may be required to make payments or take other actions to cure the
default (if it has the right to do so) in order to prevent foreclosure on the
senior mortgage and possible loss of all or portions of the Partnership's
investment. "Due on sale" clauses included in some senior mortgages,
accelerating the amount due under the senior mortgage in the case of sale of the
property, may be applied to the sale of the property upon foreclosure by the
Partnership of its junior mortgage loan.
The risk of lending on real estate increases as the proportion which the amount
of the mortgage loan bears to the fair market value of the real estate
increases. The Partnership usually does not make mortgage loans of over 80% of
the estimated or appraised value of the property that secures the loan. There
can be no assurance, that in the event of a default, the Partnership will
realize an amount equal to the estimated or appraised value of the property on
which a mortgage loan was made.
Mortgage loans made by the Partnership may be subject to state usury laws. These
laws impose limits on interest charges and possible penalties for violation of
those limits, including restitution of excess interest, unenforceability of
debt, and treble damages. The Partnership does not intend to make mortgage loans
at usurious rates of interest. Uncertainties in determining the legality of
interest rates and other borrowing charges under some statutes could result in
inadvertent violations, in which case the Partnership could incur the penalties
mentioned above.
3. Risks with Participations. The Partnership may seek to invest in mortgage
loans and leasebacks with participations, which will provide the Partnership
with both fixed interest and additional interest based upon gross revenues, sale
proceeds, and/or other variable amounts. If the interest income received by the
Partnership is based, in part, on a percentage of the gross revenues or sale
proceeds of the underlying property, the Partnership's income will depend on the
success in the leasing of the underlying property, the management and operation
of such property by the borrower or lessee and upon the market value of the
property upon ultimate disposition. If the Partnership negotiates a mortgage
loan with a lower fixed interest rate and an additional percentage of the gross
revenues or eventual sale proceeds of the underlying property, and the
underlying property fails to generate increased revenues or to appreciate, the
Partnership will have foregone a potentially greater fixed return without
receiving the benefit of appreciation. State laws may limit participations. In
the event of the borrower's bankruptcy, it is possible that as a result of the
Partnership's interest in the gross revenues or sale proceeds, a court could
treat the Partnership as a partner or joint venturer with the borrower, and the
Partnership could lose the priority its security interest would have
11-Real Property
been given, or be liable for the borrower's debts. The Partnership will
structure its participations to avoid being characterized as a partner or joint
venturer with the borrower.
4. Risks with Sale-Leaseback Transactions. Leaseback transactions typically
involve the acquisition of land and improvements thereon and the leaseback of
such land and improvements to the seller or another party. The value of the land
and improvements will depend, in large part, on the performance and financial
stability of the lessee and its tenants, if any. The tenants' leases may have
shorter terms than the leaseback. Therefore, the lessee's future ability to meet
payment obligations to the Partnership will depend on its ability to obtain
renewals of such leases or new leases upon satisfactory terms and the ability of
the tenants to meet their rental payments to the lessee.
PREI investigates the stability and creditworthiness of lessees in all
commercial properties it may acquire, including leaseback transactions. However,
a lessee in a leaseback transaction may have few, if any, assets. The
Partnership will therefore rely for its security on the value of the land and
improvements. When the Partnership's leaseback interest is subordinate to other
interests in the land or improvements, such as a first mortgage or other lien,
the Partnership's leaseback will be subject to greater risk. A default by a
lessee or other premature termination of the leaseback may result in the
Partnership being unable to recover its investment unless the property is sold
or leased on favorable terms. The ability of the lessee to meet its obligations
under the leaseback, and the value of a property, may be affected by a number of
factors inherent in the ownership of real property which are described above.
Furthermore, the long-term nature of a leaseback may, in the future, result in
the Partnership receiving lower average annual rentals. However, this risk may
be lessened if the Partnership obtains participations in connection with its
leasebacks.
Reliance on The Partners and The Investment Manager
You do not have a vote in determining the policies of the Partnership or the
Real Property Account. You also have no right or power to take part in the
management of the Partnership or the Real Property Account. The investment
manager alone, subject to the supervision of the Partners, will make all
decisions with respect to the management of the Partnership, including the
determination as to what properties to acquire, subject to the investment
policies and restrictions. Although the Partners have the right to replace
Prudential as the investment manager, it should be noted that Pruco Life is a
direct wholly-owned subsidiary of Prudential, and Pruco Life of New Jersey is an
indirect wholly-owned subsidiary of Prudential.
The Partnership will compete in the acquisition of its investments with many
other individuals and entities engaged in real estate activities, including the
investment manager and its affiliates. See CONFLICTS OF INTEREST, page 13. There
may be intense competition in obtaining properties or mortgages in which the
Partnership intends to invest. Competition may result in increased costs of
suitable investments.
Since the Partnership will continuously look for new investments, you will not
be able to evaluate the economic merit of many of the investments which may be
acquired by the Partnership. You must depend upon the ability of the investment
manager to select investments.
INVESTMENT RESTRICTIONS
The Partnership has adopted certain restrictions relating to its investment
activities. These restrictions may be changed, if the law permits, by the
Partners. Pursuant to these restrictions, the Partnership will not:
1. Make any investments not related to real estate, other than liquid
instruments and securities.
2. Engage in underwriting of securities issued by others.
3. Invest in securities issued by any investment company.
4. Sell securities short.
5. Purchase or sell oil, gas, or other mineral exploration or development
programs.
6. Make loans to the Partners, any of their affiliates, or any investment
program sponsored by such parties.
7. Enter into leaseback transactions in which the lessee is Prudential, Pruco
Life, Pruco Life of New Jersey, their affiliates, or any investment program
sponsored by such parties.
12-Real Property
8. Borrow more than 33 1/3% (pursuant to California state requirements) of the
value of the assets of the Partnership (based upon periodic valuations and
appraisals). See VALUATION OF CONTRACT OWNERS' PARTICIPATING INTERESTS,
page 15.
CONFLICTS OF INTEREST
Prudential, as the investment manager, will be subject to various conflicts of
interest in managing the Partnership. Prudential invests in real estate equities
and mortgages for its own general account and for third parties, including
through separate accounts established for the benefit of qualified pension and
profit-sharing plans. Prudential also manages, or advises in the management of,
real estate equities and mortgages owned by other persons. In addition,
affiliates of Prudential are general partners in publicly offered limited
partnerships that invest in real estate equities and mortgage loans. Prudential
and its affiliates may engage in business activities which will be competitive
with the Partnership. Moreover, the Partnership may purchase properties from
Prudential or its affiliates.
The conflicts involved in managing the Partnership include:
1. Lack of Independent Negotiations between the Partnership and Prudential. All
agreements and arrangements relating to compensation between the Partnership and
Prudential or any affiliate of Prudential will not be the result of arm's-length
negotiations.
2. Competition by the Partnership with Prudential's Affiliates for Acquisition
and Disposition of Investments. Prudential and its affiliates are involved in
numerous real estate investment activities for Prudential's general account, its
separate accounts, and other entities. They may involve investment policies
comparable to the Partnership's and may compete with the Partnership for the
acquisition and disposition of investments. Moreover, additional accounts or
affiliated entities may be formed in the future with investment objectives
similar to those of the Partnership. In short, existing or future real estate
investment accounts or entities managed or advised by Prudential or its
affiliates may have the same management as the Partnership and may be in
competition with the Partnership regarding real property investments, mortgage
loan investments, leasebacks, and the management and sale of such investments.
Prudential and its affiliates are not obligated to present to the Partnership
any particular investment opportunity, regardless of whether the opportunity
would be suitable for investment by the Partnership.
Prudential and its affiliates have, however, adopted procedures to distinguish
between equity investments available for the Partnership as opposed to the other
programs and entities described above. If investment accounts or entities
managed by Prudential or its affiliates have investment objectives and policies
similar to the Partnership and are in the market to acquire properties or make
investments at the same time as the Partnership, the following procedures will
be followed to resolve any conflict of interest. The Investment Allocation
Procedure ("IAP") has been established to provide a reasonable and fair
procedure for allocating real estate investments among the several accounts
managed by Prudential Real Estate Investors ("PREI"). The IAP is administered by
an Allocation Committee composed of the Managing Directors, Portfolio
Management. Allocation decisions are made by vote of the Allocation Committee,
and are approved by the Chief Executive Officer of PREI ("CEO"). Sufficient
information on each investment opportunity is distributed to all portfolio
managers, who each indicate to the Allocation Committee their account's interest
in the opportunity. Based on such expressions of interest, the Allocation
Committee allocates the investment opportunity to an account (and may also
determine a back-up account or accounts to receive the allocation in the event
the account, which is first allocated the opportunity, fails to pursue the
investment for any reason) after giving appropriate consideration to the
following factors and with the goal of providing each account a fair allotment
of investment opportunities: (1) the investment opportunity's conformity with an
account's investment criteria and objectives (including property type, size and
location, diversification, anticipated returns, investment structure, etc.); (2)
the amount of funds available for investment (in total and by property type) by
an account; (3) the length of time such funds (in total and by property type)
have been available for investment; (4) any limitations or restrictions upon the
availability of funds for investment; (5) the absolute and relative (to amount
of funds available) amount of funds invested and committed for the account; (6)
whether funds available for investment are discretionary or non-discretionary,
particularly in relation to the timing of the investment opportunity; (7) an
account's prior dealings or investments with the seller, developer, lender or
other counterparty; and (8) other factors which the Allocation Committee feel
should be considered in fairness to all accounts participating in the IAP.
13-Real Property
If an account which has been allocated an investment opportunity does not
proceed with the acquisition, and either (i) no back-up account has been
determined by the Allocation Committee, or (ii) all accounts which were deemed
back-up accounts do not proceed with the acquisition, the opportunity may be
reallocated to another account by the Allocation Committee. If an investment
opportunity is appropriate for more than one account, the Allocation Committee
may (subject to the CEO's approval) permit the sharing of the investment among
accounts which permit such sharing. Such division of the investment opportunity
may be accomplished by separating properties (in a multi-property investment),
by co-investment, or otherwise.
3. Competition with the Partnership from Affiliates for the Time and Services of
Common Officers, Directors, and Management Personnel. As noted above, Prudential
and its affiliates are involved in numerous real estate investment activities.
Accordingly, many of the personnel of Prudential and its affiliates who will be
involved in performing services for the Partnership have competing demands on
their time. Conflicts of interest may arise with respect to allocating time
among such entities and the Partnership. The directors and officers of
Prudential and affiliates will determine how much time will be devoted to the
Partnership affairs. Prudential believes it has sufficient personnel to meet its
responsibilities to all entities to which it is affiliated.
4. Competitive Properties. Some properties of affiliates may be competitive with
Partnership properties. Among other things, the properties could be in
competition with the Partnership's properties for prospective tenants.
5. Lessee Position. It is possible that Prudential or its affiliates may be a
lessee in one or more of the properties owned by the Partnership. The terms of
such a lease will be competitive with leases with non-affiliated third parties.
The Partnership limits the amount of space that an affiliate of Prudential may
rent in a property owned by the Partnership.
6. Use of Affiliates to Perform Additional Services for the Partnership. The
Partnership may engage Prudential affiliates to provide additional services to
the Partnership, such as real estate brokerage, mortgage servicing, property
management, leasing, property development, and other real estate-related
services. The Partnership may utilize the services of such affiliates and pay
their fees, as long as the fees paid to an affiliate do not exceed the amount
that would be paid to an independent party for similar services rendered in the
same geographic area.
7. Joint Ventures with Affiliates. The Partnership may enter into investments
through joint ventures with Prudential, its affiliates, or investment programs
they sponsor. The Partnership may enter into such a joint venture investment
with an affiliate only if the following conditions are met: (1) the affiliate
must have investment objectives substantially identical to those of the
Partnership; (2) there must be no duplicative property management fee, mortgage
servicing fee or other fees; (3) the compensation payable to the sponsor of the
affiliate must be no greater than that payable to the Partnership's investment
manager; (4) the Partnership must have a right of first refusal to buy if such
affiliate wishes to sell the property held in the joint venture; and (5) the
investment of the Partnership and the affiliate in the joint venture must be
made on the same terms and conditions (although not the same percentage). In
connection with such an investment, both affiliated parties would be required to
approve any decision concerning the investment. Thus, an impasse may result in
the event the affiliated joint venture partners disagree. However, in the event
of a disagreement regarding a proposed sale or other disposition of the
investment, the party not desiring to sell would have a right of first refusal
to purchase the affiliated joint venture partner's interest in the investment.
If this happens, it is possible that in the future the joint venture partners
would no longer be affiliated. In the event of a proposed sale initiated by the
joint venture partner, the Partnership would also have a right of first refusal
to purchase the joint venture partner's interest in the investment. The exercise
of a right of first refusal would be subject to the Partnership's having the
financial resources to effectuate such a purchase.
If the Partnership invests in joint venture partnerships which own properties,
instead of investing directly in the properties themselves, they may be subject
to risks not otherwise present. These risks include risks associated with the
possible bankruptcy of the Partnership's co-venturer or such co-venturer at any
time having economic or business interests or goals which are inconsistent with
those of the Partnership.
8. Purchase of Real Property From Prudential or Affiliates. The Partnership may
acquire properties owned by Prudential or its affiliates, subject to compliance
with special conditions designed to minimize the conflicts of interests. The
Partnership may purchase property satisfying the Partnership's investment
objectives and policies from an affiliate only if: (1) the applicable insurance
regulators approve the Partnership's acquisition of real property from
Prudential or affiliates to the extent such approval is required under
applicable insurance regulations; (2) the Partnership acquires the property at a
price not greater than the appraised value, with the appraisal being conducted
by a qualified, unaffiliated appraiser; (3) a qualified and independent real
estate adviser (other than the appraiser) reviews the proposed acquisition and
provides a letter of opinion that the transaction is fair to the Partnership;
and (4) the affiliate has owned the property at least two years, the cost paid
by the affiliate is established, and any increase in the proposed purchase
14-Real Property
price over the cost to the affiliate is, in the opinion of the independent real
estate adviser, explicable by material factors (including the passage of time)
that have increased the value of the property.
THE REAL PROPERTY ACCOUNT'S UNAVAILABILITY TO
CERTAIN CONTRACTS
Pruco Life has determined that it is in the best interest of Contract owners
participating in the Real Property Account to provide the Real Property Account
with the flexibility to engage in transactions that may be prohibited if the
Real Property Account accepts funds under Contracts subject to ERISA or the
prohibited transaction excise tax provisions of the Internal Revenue Code.
Accordingly, owners of Pruco Life Contracts that are purchased in connection
with: (1) IRAs; (2) tax deferred annuities subject to Section 403(b) of the
Code; (3) other employee benefit plans which are subject to ERISA; or (4)
prohibited transaction excise tax provisions of the Code, may not select the
Real Property Account as one of the investment options under their Contract. By
not offering the Real Property Account as an investment option under such
contracts, Pruco Life is able to comply with state insurance law requirements
that policy loans be made available to Contract owners.
VALUATION OF CONTRACT OWNERS' PARTICIPATING
INTERESTS
A Contract owner's interest in the Real Property Account will initially be the
amount they allocated to the Real Property Account. Thereafter, that value will
change daily. The value of a Contract owner's interest in the Real Property
Account at the close of any day is equal to its amount at the close of the
preceding day, multiplied by the "net investment factor" for that day arising
from the Real Property Account's participation in the Partnership, plus any
additional amounts allocated to the Real Property Account by the Contract owner,
and reduced by any withdrawals by the Contract owner from the Real Property
Account and by the applicable Contract charges recorded in that Contract's
subaccount. Some of the charges will be made: (1) daily; (2) on the Contract's
monthly anniversary date; (3) at the end of each Contract year; and (4) upon
withdrawal or annuitization. Periodically Pruco Life will withdraw from the Real
Property Account an amount equal to the aggregate charges recorded in the
subaccounts.
The "net investment factor" is calculated on each business day by dividing the
value of the net assets of the Partnership at the end of that day (ignoring, for
this purpose, changes resulting from new contributions to or withdrawals from
the Partnership) by the value of the net assets of the Partnership at the end of
the preceding business day. The value of the net assets of the Partnership at
the end of any business day is equal to the sum of all cash held by the
Partnership plus the aggregate value of the Partnership's liquid securities and
instruments, the individual real properties and the other real estate-related
investments owned by the Partnership, determined in the manner described below,
and an estimate of the accrued net operating income earned by the Partnership
from properties and other real estate-related investments, reduced by the
liabilities of the Partnership, including the daily investment management fee
and certain other expenses attributable to the operation of the Partnership. See
CHARGES, page 16.
The Partnership may invest in various liquid securities and instruments. These
investments will generally be carried at their market value as determine by a
valuation method which the Partners deem appropriate for the particular type of
liquid security or instrument.
The value of the individual real properties and other real estate-related
investments, including mortgages, acquired by the Partnership will be determined
as follows. Each property or other real estate-related investment acquired by
the Partnership will initially be valued at its purchase price. In acquiring a
property or other real estate-related investment, Prudential will not obtain an
independent appraisal but will instead rely on its own analysis of the
investment's fair market value. Thereafter, all properties and most real
estate-related investments will ordinarily be appraised by an independent
appraiser at least annually. At least every three months, Prudential will review
each property or other real estate-related investments and adjust its valuation
if it concludes there has been a change in the value of the property or other
real estate-related investment since the last valuation. The revised value will
remain in effect and will be used in each day's calculation of the value of the
Partnership's assets until the next review or appraisal. It should be noted that
appraisals are only estimates and do not necessarily reflect the realizable
value of an investment.
The estimated amount of the net operating income of the Partnership from
properties and other real estate-related investments will be based on estimates
of revenues and expenses for each property and other real estate-related
investments. Annually, Prudential will prepare a month-by-month estimate of the
revenues and expenses ("estimated net operating income") for each property and
other real estate-related investments owned by the Partnership. Each day
Prudential will add to the value of the assets, as determined above, a
proportionate part of the estimated net
15-Real Property
operating income for the month. In effect, Prudential will establish a daily
accrued receivable of the estimated net operating income from each property and
other real estate-related investments owned by the Partnership (the "daily
accrued receivable"). On a monthly basis, the Partnership will receive a report
of actual operating results for each property and other real estate-related
investments ("actual net operating income"). Such actual net operating income
will be recognized on the books of the Partnership and the amount of the
then-outstanding daily accrued receivable will be correspondingly adjusted. In
addition, as cash from a property or other real estate-related investment is
actually received by the Partnership, receivables and other accounts will be
appropriately adjusted. Periodically, but at least every three months,
Prudential will review its prospective estimates of net operating income in
light of actual experience and make an adjustment to such estimates if
circumstances indicate that such an adjustment is warranted. Prudential follows
this practice of accruing estimated net operating income from properties and
other real estate-related investments because net operating income from such
investments is generally received on an intermittent rather than daily basis,
and the Partners believe it is more equitable to participating Contract owners
if such net operating income is estimated and a proportionate amount is
recognized daily. Because the daily accrual of estimated net operating income is
based on estimates that may not turn out to reflect actual revenue and expenses,
Contract owners will bear the risk that this practice will result in the
undervaluing or overvaluing of the Partnership's assets.
Prudential may adjust the value of any asset held by the Partnership based on
events that have increased or decreased the realizable value of a property or
other real estate-related investment. For example, adjustments may be made for
events indicating an impairment of a borrower's or a lessee's ability to pay any
amounts due or events which affect the property values of the surrounding area.
There can be no assurance that the factors for which an adjustment may be made
will immediately come to the attention of Prudential. Additionally, because the
evaluation of such factors may be subjective, there can be no assurance that
such adjustments will be timely made in all cases where the value of the
Partnership's investments may be affected. All adjustments made to the valuation
of the Partnership's investments, including adjustments to estimated net
operating income, the daily accrued receivable, and adjustments to the valuation
of properties and other real estate-related investments, will be on a
prospective basis only.
The above method of valuation of the Partnership's assets may be changed,
without the consent of Contract owners, should the Partners determine that
another method would more accurately reflect the value of the Partnership's
investments. Changes in the method of valuation could result in a change in the
Contract Fund values which may have either an adverse or beneficial effect on
Contract owners. Information concerning any material change in the valuation
method will be given to all Contract owners in the annual report of the
operations of the Real Property Account.
Although the above-described valuation methods have been adopted because the
Partners believe they will provide a reasonable way to determine the fair market
value of the Partnership's investments, there may well be variations between the
amount realizable upon disposition and the Partnership's valuation of such
assets. Contract owners may be either favorably or adversely affected if the
valuation method results in either overvaluing or undervaluing the Partnership's
investments. If a Contract owner invests in the Real Property Account at a time
in which the Partnership's investments are overvalued, the Contract owner will
be credited with less of an interest than if the value had been correctly
stated. A Contract owner withdrawing from the Real Property Account during such
time will receive more than he or she would if the value had been correctly
stated, to the detriment of other Contract owners. The converse situation will
exist if the Partnership's assets are undervalued.
BORROWING BY THE PARTNERSHIP
The Partnership may borrow for Partnership purposes, including to meet its
liquidity requirements and the leveraging of currently-owned property to buy new
property, subject to a maximum debt to value ratio of 33 1/3 (pursuant to
California state requirements) based on the aggregate value of all Partnership
assets. The Partnership will bear the cost of all such borrowings. The Real
Property Account, and Contract owners participating in it, will bear a portion
of any borrowing costs equal to their percentage interest in the Partnership.
Moreover, although the Partnership will generally make unleveraged investments,
it reserves the right to borrow up to 80% of the value of a property (with the
value of a property determined as explained under VALUATION OF CONTRACT OWNERS'
PARTICIPATING INTERESTS, page 15). Increasing the Partnership's assets through
leveraged investments would increase the compensation paid to Prudential since
its investment management fee is a percentage of the Partnership's gross assets.
Any borrowing by the Partnership would increase the Partnership's risk of loss.
It could also inhibit the Partnership from achieving its investment objectives
because the Partnership's payments on any loans would have to be made regardless
of the profitability of its investments.
CHARGES
Pursuant to an investment management agreement, Prudential charges the
Partnership a daily investment management fee which is equal to an effective
annual rate of 1.25% of the average daily gross assets of the
16-Real Property
Partnership. Certain other expenses and charges attributable to the operation of
the Partnership are also charged against the Partnership. In acquiring an
investment, the Partnership may incur various types of expenses paid to third
parties, including but not limited to, brokerage fees, attorneys' fees,
architects' fees, engineers' fees, and accounting fees. After acquisition of an
investment, the Partnership will incur recurring expenses for the preparation of
annual reports, periodic appraisal costs, mortgage servicing fees, annual audit
charges, accounting and legal fees, and various administrative expenses. These
expenses will be charged against the Partnership's assets. Some of these
operating expenses represent reimbursement of Prudential for the cost of
providing certain services necessary to the operation of the Partnership, such
as daily accounting services, preparation of annual reports, and various
administrative services. Prudential charges the Partnership mortgage loan
servicing fees pursuant to the standards outlined in item 6 under CONFLICTS OF
INTEREST, page 13. In addition to the various expenses charged against the
Partnership's assets, other expenses such as insurance costs, taxes, and
property management fees will ordinarily be deducted from rental income, thereby
reducing the gross income of the Partnership.
As explained earlier, charges to the Contracts will be recorded in the
corresponding subaccounts of the Real Property Account. From time to time, Pruco
Life will withdraw from the Real Property Account an amount equal to the
aggregate amount of these charges. Aside from the charges to the Contracts,
Pruco Life does not charge the Real Property Account for the expenses involved
in the Real Property Account's operation. The Real Property Account will however
bear its proportionate share of the charges made to the Partnership as described
above.
The Partnership is not a taxable entity under the provisions of the Internal
Revenue Code. The income, gains, and losses of the Partnership are attributed,
for federal income tax purposes, to the Partners in the Partnership. The
earnings of the Real Property Account are, in turn, taxed as part of the
operations of Pruco Life. Pruco Life is currently not charging the Real Property
Account for company federal income taxes. Pruco Life may make such a charge in
the future.
Under current laws Pruco Life may incur state and local taxes (in addition to
premium taxes) in several states. At present, Pruco Life does not charge these
taxes against the Contracts or the Real Property Account, but Pruco Life may
decide to charge the Real Property Account for such taxes in the future.
RESTRICTIONS ON WITHDRAWALS
Before allocating any portion of your net premium or purchase payments, or
transferring any portion of your Contract Fund, to the Real Property Account,
you should be aware that withdrawals from the Real Property Account may have
greater restrictions than the other variable investment options available under
the Contracts. Pruco Life reserves the right to restrict transfers into or out
of the Real Property Account. Apart from the limitations on transfers out of the
Real Property Account described below, Pruco Life will only restrict transfers
out of the Real Property Account if there is insufficient cash available to meet
Contract owners' requests and prompt disposition of the Partnership's
investments to meet such requests could not be made on commercially reasonable
terms.
Pruco Life will pay any death benefit, cash surrender value, withdrawal or loan
proceeds within seven days after receipt at a Pruco Life Service Office of all
the documents required for such a payment. Other than the death benefit, which
is determined as of the date of death for life insurance products, the amount
will be determined as of the date of receipt of the request.
The funds necessary to pay any death benefit, cash surrender value, withdrawal
or loan proceeds funded by the Real Property Account will normally be obtained,
first, from any cash flows into the Real Property Account on the day the funds
are required. If, on the day the funds are required, cash flows into the Real
Property Account are less than the amount of funds required, Pruco Life will
seek to obtain such funds by withdrawing a portion of its interest in the
Partnership. The Partnership will normally obtain funds to meet such a
withdrawal request from its net operating income and from the liquid securities
and instruments it holds. If the Partners determine that these sources are
insufficient to meet anticipated withdrawals from the Partnership, the
Partnership may use a line of credit or otherwise borrow up to 33 1/3% (pursuant
to California state requirements) of the value of the Partnership's assets. See
BORROWING BY THE PARTNERSHIP, page 16. If the Partners determine that such a
borrowing by the Partnership would not serve the best interests of Contract
owners, Pruco Life may, in the event of a Contract loan or withdrawal, rather
than take the amount of any loan or withdrawal request proportionately from all
investment options under the Contract (including the Real Property Account),
take any such loan or withdrawal first from the other investment options under
the Contract.
Transfers from the Real Property Account to the other investment options
available under the Contract are currently permitted only during the 30-day
period beginning on the Contract anniversary. The maximum amount that may be
transferred out of the Real Property Account each year is the greater of: (a)
50% of the amount invested in the Real
17-Real Property
Property Account or (b) $10,000. Such transfer requests received prior to the
Contract anniversary will be effected on the Contract anniversary. Transfer
requests received within the 30-day period beginning on the Contract anniversary
will be effected as of the end of the valuation period in which a proper written
request or authorized telephone request is received. The "valuation period"
means the period of time from one determination of the value of the amount
invested in the Real Property Account to the next. Such determinations are made
when the value of the assets and liabilities of the Partnership is calculated,
which is generally at 4:15 p.m. Eastern time on each day during which the New
York Stock Exchange is open. Transfers into or out of the Real Property Account
are also subject to the general limits under the Contracts.
RESTRICTIONS ON CONTRACT OWNERS' INVESTMENT IN THE
REAL PROPERTY ACCOUNT
As explained earlier, identification and acquisition of real estate investments
meeting the Partnership's investment objectives is a time-consuming process.
Because the Real Property Account and the Partnership are managed so they will
not become investment companies subject to the Investment Company Act of 1940,
the portion of the Partnership's assets that may be invested in securities, as
opposed to non-securities real estate investments, is strictly limited. For
these reasons, Pruco Life reserves the right to restrict or limit Contract
owners' allocation of funds to the Real Property Account. Any such restrictions
are likely to take the form of restricting the timing, amount and/or frequency
of transfers into the Real Property Account and/or precluding Contract owners
who have not previously selected the Real Property Account from allocating a
portion of their net premiums or purchase payments to the Real Property Account.
FEDERAL INCOME TAX CONSIDERATIONS
The federal income tax treatment of Contract benefits is described briefly in
the attached prospectus for the particular Contract you selected. Pruco Life
believes that the same principles will apply with respect to Contracts funded in
whole or part by the Real Property Account. The Partnership's conformity with
the diversification standards for the investments of variable life insurance and
variable annuity separate accounts is essential to ensure that treatment. See
General Investment and Operating Policies, page 8. Pruco Life urges you to
consult a qualified tax adviser.
Under the Internal Revenue Code, the Partnership is not a taxable entity and any
income, gains or losses of the Partnership are passed through to the Partners,
including Pruco Life, with respect to the Real Property Account. The Real
Property Account is not a separate taxpayer for purposes of the Internal Revenue
Code. The earnings of the Real Property Account are taxed as part of the
operations of Pruco Life. No charge is currently being made to the Real Property
Account for company federal income taxes. We may make such a charge in the
future, see CHARGES, page 16.
DISTRIBUTION OF THE CONTRACTS
As explained in the attached prospectus for the Contracts, Pruco Securities
Corporation, an indirect, wholly-owned subsidiary of Prudential, acts as the
principal underwriter of the Contracts. Consult that prospectus for information
about commission scales and other facts relating to sale of the Contracts.
STATE REGULATION
Pruco Life is subject to regulation and supervision by the Department of
Insurance of the State of Arizona, which periodically examines its operations
and financial condition. It is also subject to the insurance laws and
regulations of all jurisdictions in which it is authorized to do business.
Pruco Life is required to submit annual statements of its operations, including
financial statements, to the insurance departments of the various jurisdictions
in which it does business to determine solvency and compliance with local
insurance laws and regulations.
In addition to the annual statements referred to above, Pruco Life is required
to file with Arizona and other jurisdictions a separate statement with respect
to the operations of all its variable contract accounts, in a form promulgated
by the National Association of Insurance Commissioners.
18-Real Property
ADDITIONAL INFORMATION
Pruco Life has filed a registration statement with the Securities and Exchange
Commission ("SEC") under the Securities Act of 1933, relating to the offering
described in this prospectus. This prospectus does not include all of the
information set forth in the registration statement. Certain portions have been
omitted pursuant to the rules and regulations of the SEC. All reports and
information filed by Pruco Life can be inspected and copied at the Public
Reference Section of the Commission at 450 Fifth Street, Room 1024, N.W.,
Washington, D.C. 20549, and at certain of its regional offices: Midwestern
Regional Office, CitiCorp Center, 500 West Madison Street, Suite 1400, Chicago,
IL 60661-2511; Northeastern Regional Office SEC, 7 World Trade Center, Suite
1300, New York, NY 10048, or by telephoning (800) SEC-0330.
The SEC maintains a Web site (http://www.sec.gov) that contains material
incorporated by reference and other information regarding registrants that file
electronically with the SEC.
Further information may also be obtained from Pruco Life. The address and
telephone number are on the cover of this prospectus.
EXPERTS
The financial statements of The Partnership as of December 31, 2000 and 1999 and
for each of the three years in the period ended December 31, 2000 and the
financial statements of the Real Property Account as of December 31, 2000 and
1999 and for each of the three years in the period ended December 31, 2000
included in this prospectus have been so included in reliance on the reports of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting. PricewaterhouseCoopers LLP's
principal business address is 1177 Avenue of the Americas, New York, New York
10036.
LITIGATION
No litigation is pending, and no litigation is known to be contemplated by
governmental authorities, that would have an adverse material effect upon the
Real Property Account or the Partnership.
REPORTS TO CONTRACT OWNERS
If you allocate a portion of your Contract Fund to the Real Property Account,
Pruco Life will mail you an annual report containing audited financial
statements for the Partnership and an annual statement showing the status of
your Contract Fund and any other information that may be required by applicable
regulation or law.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
All of the assets of the Real Property Account are invested in the Partnership.
Correspondingly, the liquidity, capital resources and results of operations for
the Real Property Account are contingent upon the Partnership. Therefore, all of
management's discussion of these items is at the Partnership level. The partners
in the Partnership are The Prudential Insurance Company of America, Pruco Life
Insurance Company, and Pruco Life Insurance Company of New Jersey (collectively,
the "Partners").
The following analysis of the liquidity and capital resources and results of
operations of the Partnership should be read in conjunction with the Financial
Statements and the related Notes to the Financial Statements included elsewhere
herein.
Liquidity and Capital Resources
As of December 31, 2000, the Partnership's liquid assets consisting of cash,
cash equivalents and marketable securities were $15.5 million, a decrease of
$1.3 million from December 31, 1999. This decrease was due primarily to
distributions to Partners of $22 million, coupled with the investment of
available cash in real estate assets. Offsetting these cash outflows was $12.9
million in proceeds received from the sale of one of the Partnership's office
properties, $8.2 million in proceeds from the sale of the Partnership's entire
investment in ProLogis REIT shares, and net cash flow from property operations.
Other sources of liquidity include interest from short-term investment and
dividends from REIT shares.
19-Real Property
The Partnership's investment policy allows up to 30% investment in cash and
short-term obligations, although the Partnership generally holds approximately
10% of its assets in cash or liquid instruments. At December 31, 2000, 7% of the
Partnership's assets consisted of cash, cash equivalents and marketable
securities.
In 1986, Prudential committed to fund up to $100 million to enable the
Partnership to acquire real estate investments. Contributions to the Partnership
under this commitment have been utilized for property acquisitions, and returned
to Prudential on an ongoing basis from Contract owners' net contributions and
other available cash. The amount of the commitment is reduced by $10 million for
every $100 million in current value net assets of the Partnership. Thus, with
$206 million in net assets, the commitment has been automatically reduced to $80
million. As of December 31, 2000, Prudential's equity interest in the
Partnership under this commitment, on a cost basis, was $44 million. At the
present time, Prudential does not intend to make any contributions during the
2001 fiscal year and will begin to phase out this commitment over the next
several years.
As discussed previously, the Partners made $22 million in withdrawals during
2000 from excess cash. Additional distributions may be made to the Partners
during 2001 based upon the percentage of assets invested in short-term
obligations, taking into consideration anticipated cash needs of the Partnership
including potential property acquisitions, property dispositions and capital
expenditures. Management anticipates that its current liquid assets and ongoing
cash flow from operations will satisfy the Partnership's needs over the next
twelve months and the foreseeable future.
During 2000, the Partnership spent approximately $4.2 million in additions to
real estate properties. Approximately $1.7 million was associated with the
renovation of the apartment complex located in Jacksonville, FL. The remaining
$2.2 million balance was primarily associated with capital expenditures in
relation to leasing activity at the office properties located in Brentwood, TN,
Morristown, NJ, and Beavorton, OR.
Results of Operations
The following is a brief discussion of the Partnership's results of operations
for the years ended December 31, 2000, 1999, and 1998.
2000 vs. 1999
The following table presents a comparison of the Partnership's sources of net
investment income, and realized and unrealized gains or losses by investment
type, for the twelve months ended December 31, 2000 and December 31, 1999.
Year Ended December 31,
2000 1999
------------ ------------
Net Investment Income:
Office properties $5,356,934 $7,133,356
Apartment complexes 3,446,245 2,556,743
Retail property 2,772,438 2,676,387
Industrial properties 1,257,146 894,258
Equity in income of real estate 791,596 98,375
partnership
Dividend income from real
estate investment trust 1,744,611 1,221,843
Other (including interest income,
Investment management fee, etc.) (1,730,853) (1,301,373)
============ ============
Total Net Investment Income $13,638,117 $13,279,589
============ ============
20-Real Property
Unrealized Gain (Loss) on
Investments:
Office properties $(2,434,245) $(3,267,264
Apartment complexes 2,717,915 607,234
Retail property (264,300) (1,770,462)
Industrial properties (935,721) 209,503
Interest in properties 140,614 (680,870)
Real estate investment trust 2,618,815) (2,282,044
----------- -----------
1,843,078 (7,183,903)
Realized Gain (Loss) on
Investments:
Office properties $ 186,920 --
Apartment complexes -- --
Industrial properties -- (1,485)
Interest in properties -- 45,126
Real estate investment trust 2,457,024 (76,784)
----------- -----------
2,643,944 (33,143)
=========== ===========
Total Realized and Unrealized Gain
(Loss) on Investments $ 4,487,022 ($7,217,046)
=========== ===========
The Partnership's net investment income for 2000 was $13.6 million, an increase
of $0.3 million from net investment income of $13.3 million in 1999.
Equity in income of real estate partnership increased $0.7 million, or 704.7%,
in 2000 due to the acquisition of an equity investment interest in the retail
portfolio located in the Kansas City, MO area. This interest was not acquired
until September 30, 1999. Therefore, equity in income of real estate
partnerships for the period ended December 31, 1999 represents only three months
of activity, while activity for the period ended December 31, 2000 represents a
full year of activity.
Dividend income from real estate investment trusts was $1.7 million for the year
ended December 31, 2000, an increase of $0.5 million or 42.8% from the
corresponding period in 1999. This increase was primarily due to higher amounts
invested in real estate investment trusts. Amounts invested in REIT shares
averaged approximately $28.6 million during 2000 compared to approximately $22.4
million during 1999.
Interest on short-term investments decreased approximately $0.4 million or 25.0%
for the twelve months ended December 31, 2000 due primarily to a significantly
lower average cash balance. Cash and cash equivalents during 2000 averaged
approximately $16.6 million compared to approximately $32.0 million during 1999.
Operating expenses increased $0.6 million or 15.7% to $4.4 million during the
period ended December 31, 2000 when compared to the corresponding period in
1999. This increase was primarily a result of the Partnership's acquisition of a
controlling interest in the apartment complex located in Jacksonville, FL.
Interest expense increased $0.6 million, or 404.1%, in 2000 when compared to the
corresponding periods in 1999. This increase was due to the Partnership's
acquisition on September 30, 1999 of a controlling interest in the apartment
complex located in Jacksonville, FL, which was acquired subject to $10.2 million
in debt.
Office Properties
Net investment income from property operations for the office sector decreased
approximately $1.8 million, or 24.9%, in 2000 when compared to 1999. This
decrease was primarily due to lower revenue levels experienced by the Oakbrook
Terrace, IL office complex during 2000 as a result of the lease termination fee
received during 1999 coupled with a corresponding decrease in occupancy. A 36%
decrease in occupancy at one of the Brentwood, TN office properties also
contributed to the decrease.
21-Real Property
The office properties owned by the Partnership experienced a net unrealized loss
of approximately $2.4 million during 2000 compared to a net unrealized loss of
$3.3 million in 1999.
During 2000, the Oakbrook Terrace, IL property decreased $1.6 million in value
due to a lease termination associated with 45% of the space and weaker market
conditions. One of the Brentwood, TN office properties also experienced a net
unrealized loss of approximately $0.8 million primarily due to capital
expenditures on the property that were not reflected as an increase in market
value.
Approximately half of the $3.3 million net unrealized loss in 1999 was
attributable to the office building located in Oakbrook Terrace, IL, which
experienced costs associated with re-leasing and expected vacancy resulting from
the lease termination exercised by a tenant. The Beaverton, OR office property
also experienced a net unrealized loss of approximately $0.8 million. This
decline in value was partially attributable to an anticipated reduction in
investor demand for suburban office properties. The Lisle, IL office property
also experienced a net unrealized loss of approximately $0.7 million primarily
due to capital expenditures on the property that were not reflected as an
increase in market value.
The Morristown, NJ office property was sold on October 26, 2000 and resulted in
a realized gain of approximately $0.2 million.
Occupancy at the Lisle, IL office property increased from 88% at December 31,
1999 to 94% at December 31, 2000. Occupancy at one of the Brentwood, TN office
complexes decreased from 95% to 59% from December 31, 1999 to December 31, 2000,
while occupancy at the other Brentwood, TN office property remained unchanged at
100%. Occupancy at the Oakbrook Terrace, IL office complex decreased from 100%
at December 31, 1999 to 52% at December 31, 2000, while occupancy at the
Beaverton, OR office complex decreased from 100% at December 31, 1999 to 95% at
December 31, 2000. As of December 31, 2000 all vacant spaces were being
marketed.
Apartment Complexes
Net investment income from property operations for the apartment sector was $3.4
million in 2000, an increase of $0.9 million or 34.8% compared with 1999. This
increase was primarily due to the acquisition of the controlling interest in the
apartment complex located in Jacksonville, FL.
The apartment complexes owned by the Partnership experienced a net unrealized
gain of $2.7 million and $0.6 million in 2000 and 1999, respectively. The
largest share of the unrealized gain for 2000 or $1.7 million was experienced by
the apartment complex located in Atlanta, GA primarily due to increases in
rental rates, stabilized occupancy, and lower operating expense estimates. The
apartment complex located in Raleigh, NC also experienced a net unrealized gain
of $0.2 million due to increases in rental rates.
The net unrealized gain of $0.6 million during 1999 was primarily experienced by
the Atlanta, GA apartment complex which increased in value due to improved
market conditions which resulted in higher rent levels.
The occupancy at the Atlanta, GA complex remained unchanged at 98% as of
December 31, 1999 and December 31, 2000. Occupancy at the apartment complex in
Raleigh, NC also remained unchanged at 92% as of December 31, 1999 and December
31, 2000. Occupancy at the Jacksonville, FL apartment complex increased from 89%
as of December 31, 1999 to 91% as of December 31, 2000. This increase is largely
a result of renovations completed at the project. As of December 31, 2000, all
available vacant units were being marketed.
Retail Property
Net investment income for the twelve months ended December 31, 2000 and 1999 for
the Partnership's retail property located in Roswell, GA was approximately $2.7
million for both periods.
The retail property experienced a net unrealized loss of $0.3 million and $1.8
million in 2000 and 1999, respectively. The unrealized loss experienced by the
property in 2000 was due to lower projected income growth, coupled with capital
expenditures which did not increase the market value of the property. The
decrease in value in 1999 was attributable to a declining position of the
property in the market.
Occupancy at the shopping center located in Roswell, GA decreased from 97% as of
December 31, 1999 to 96% as of December 31, 2000. As of December 31, 2000, all
vacant space was being marketed.
22-Real Property
Industrial Properties
Net investment income from property operations for the industrial properties
increased from $0.9 million in 1999 to $1.3 million in 2000. The majority of the
increase was a result of increased occupancy throughout 2000 at the property
located in Aurora, CO.
The three industrial properties owned by the Partnership experienced a net
unrealized loss of approximately $0.9 million and a net unrealized gain of $0.2
million in 2000 and 1999, respectively. The majority of the decrease for 2000
was attributable to the Aurora, CO industrial property, which had a loss of
approximately $0.7 million due to more conservative assumptions regarding rental
rates, lease-up time and terminal capitalization rates used by the appraiser. In
addition, capital expenditures were incurred at the property which were not
reflected as an increase in market value. The industrial property located in
Bolingbrook, IL experienced an unrealized loss of $0.4 million in 2000. This
loss was due to the expiration of the single tenant lease with no replacement
tenant being signed as of yet. A portion of the space was temporarily leased
during the fourth quarter of 2000.
The occupancy at the Bolingbrook, IL property decreased from 100% at December
31, 1999 to 45% at December 31, 2000. The occupancy at the Salt Lake City, Utah
property increased from 34% at December 31, 1999 to 100% at December 31, 2000.
The Aurora, Co property's occupancy rate remained unchanged at 75% from December
31, 1999 to December 31, 2000. As of December 31, 2000, all vacant spaces were
being marketed.
Equity in Income of Real Estate Partnership
On September 30, 1999, the Partnership invested in an equity joint venture of
retail centers located in the Kansas City, MO area. During the twelve months
ended December 31, 2000, income from this investment amounted to $0.8 million
compared to $0.1 million for the corresponding period in 1999. The increase in
income was attributable to the Partnership holding the investment for a full
year during 2000 as opposed to only three months during 1999. This investment
experienced a net unrealized gain in 2000 of $0.1 million. During 1999, the
investment experienced a net unrealized loss of $0.7 million, primarily due to
capital expenditures on the properties that were not reflected as an increase in
market value.
The retail portfolio located in the Kansas City, MO area had an average
occupancy of 91% as of December 31, 2000 compared to an average occupancy of 90%
as of December 31, 1999. As of December 31, 2000, all vacant spaces were being
marketed.
Real Estate Investment Trust
The Partnership recognized a net realized gain from real estate investment
trusts of $2.5 million in 2000 primarily due to the sale of the Partnership's
remaining investment in ProLogis REIT shares and sales of other REIT
investments.
The Partnership's investment in REIT shares experienced an unrealized gain of
$2.6 million and an unrealized loss of $2.3 million for the twelve months ended
December 31, 2000 and 1999, respectively. These changes in unrealized gain and
loss reflect changes in the market value of REIT shares held by the Partnership.
Other
Other net investment income decreased $0.5 million during 2000 compared to the
corresponding period last year. Other net investment income includes interest
income from short-term investments, investment management fees, and expenses not
related to property activities. The decrease in 2000 was primarily due to lower
interest income on short-term investments primarily as a result of the
Partnership maintaining a significantly lower cash balance as noted previously.
1999 vs. 1998
The following table presents a comparison of the Partnership's sources of net
investment income, and realized and unrealized gains or losses by investment
type, for the twelve months ended December 31, 1999 and December 31, 1998.
23-Real Property
Twelve Months Ended December 31,
1999 1998
------------ ------------
Net Investment Income:
Office properties $ 7,133,356 $ 7,269,613
Apartment complexes 2,556,743 4,493,384
Retail property 2,676,387 2,702,234
Industrial properties 894,258 1,325,320
Income from interest in properties 98,375 33,642
Dividend income from real
estate investment trust 1,221,843 669,100
Other (including interest income,
investment mgt fee, etc.) (1,301,373) (659,600)
------------ ------------
Total Net Investment Income $ 13,279,589 $ 15,833,513
============ ============
Unrealized Gain (Loss) on
Investments:
Office properties $ (3,267,264) $ 3,034,542
Apartment complexes 607,234 657,012
Retail property (1,770,462) (1,312,296)
Industrial properties 209,503) 333,630
Interest in properties (680,870) --
Real estate investment trust (2,282,044) (969,156)
------------ ------------
(7,183,903) 1,743,732
Realized Gain (Loss) on
Investments:
Apartment complexes -- 1,730,042
Industrial properties (1,485) 1,229,799
Interest in properties 45,126 91,538
Real estate investment trust (76,784) --
------------ ------------
(33,143) 3,051,379
============ ============
Total Realized and Unrealized Gain (Loss)
on Investments ($7,217,046) $4,795,111
============ ============
The Partnership's net investment income for 1999 was $13.3 million, a decrease
of $2.5 million from the prior year. This was primarily the result of the sales
of an industrial property in Pomona, CA and an apartment complex in Farmington
Hills, MI, offset by the acquisition of an apartment complex in Jacksonville,
FL. These transactions generated a reduction of $3.0 million in real estate
revenues but only $400,000 in expenses. As a result, investment income decreased
while investment expenses remained relatively flat.
Revenue from real estate and improvements was $21.8 million in 1999, a decrease
of $2.8 million, or 11.3%, from $24.6 million in 1998 mainly as a result of the
sales of the industrial property and apartment complex discussed previously.
Income from interest in properties increased $64,913, or 194.0%, from $33,462 in
1998 to $98,375 in 1999 primarily as a result of the Partnership investing in a
retail portfolio located in Kansas City, KS and Kansas City, MO.
On March 30, 1999, the Partnership converted 506,894 shares of Meridian REIT to
557,583 shares of ProLogis REIT, with a fair value of $10,942,566, and cash of
$1,013,796 (or total fair value of $11,956,362) as a result of ProLogis'
acquisition of Meridian Industrial Trust. The conversion resulted in a realized
gain of $401,713. Dividend income from
24-Real Property
real estate investment trusts amounted to $1.2 million for the year ended
December 31, 1999, an increase of $0.6 million, or 82.6%, compared to the
corresponding period in 1998. This increase was primarily due to an increase in
the amount invested in REIT stocks.
Administrative expenses increased $283,714, or 14.5%, during 1999. This increase
was primarily due to the acquisition of the apartment complex located in
Jacksonville, FL coupled with higher expense levels experienced by the Westpark
office property located in Brentwood, TN.
Interest expense increased $145,418, or 100%, in 1999 as a result of the
Partnership's investment in the apartment complex located in Jacksonville, FL,
which was acquired subject to $10.2 million in debt.
Minority interest in consolidated partnership increased $33,746, or 100%, as a
result of the Partnership's joint venture investment in the apartment complex
located in Jacksonville, FL.
Office Properties
Net investment income from property operations for the office sector decreased
approximately $136,000, or 2%, for the year ended December 31, 1999 when
compared to the corresponding period in 1998.
The six office properties owned by the Partnership experienced a net unrealized
loss of approximately $3.3 million during 1999 compared to a net unrealized gain
of $3.0 million in 1998. The largest share of this net unrealized loss was due
to the office property located in Oakbrook Terrace, IL. This $1.6 million value
decrease was due to changes in anticipated costs associated with assumed
re-leasing of the facility which were used in valuing the property. The
Beaverton, OR office property also experienced a net unrealized loss of
approximately $0.8 million. This decline in value was due to a change in
discounted cash flow assumptions resulting from the large amount of Class "A"
space under construction in the local market. In addition, a lower renewal
probability in determining the valuation of the property was utilized for a
major tenant expected to be vacating their space upon expiration. The Lisle, IL
office property also experienced a net unrealized loss of approximately $0.7
million primarily due to capital expenditures on the property that were not
reflected as an increase in market value.
The office complex located in Morristown, NJ is expected to be marketed for sale
during 2000.
Occupancy at the Beaverton, OR, Oakbrook Terrace, IL, and one of the Brentwood,
TN properties remained unchanged from December 31, 1998 at 100%. Occupancy at
the Morristown, NJ property increased from 86% at December 31, 1998 to 100% at
December 31, 1999 while occupancy at the Lisle, IL office property decreased
from 96% at December 31, 1998 to 88% at December 31, 1999. Occupancy at the
other Brentwood, TN property owned by the Partnership decreased from 100% at
December 31, 1998 to 95% at December 31, 1999. As of December 31, 1999 all
vacant spaces were being marketed.
Apartment Complexes
Net investment income from property operations for the apartment sector was $2.6
million in 1999, a decrease of $1.9 million, or 43.1%, when compared to 1998.
This decrease was primarily due to the sale of the apartment complex located in
Farmington Hills, MI in 1998.
The apartment complexes owned by the Partnership experienced a net unrealized
gain of $0.6 million for both years ended December 31, 1999 and 1998. The net
realized gain of $1.7 million experienced in 1998 was due to the Farmington
Hill, MI apartment complex which was sold on October 8, 1998 for $16.9 million.
On September 17, 1999, the Partnership invested in an apartment complex located
in Jacksonville, FL. This joint venture investment required the Partnership to
contribute $7.5 million and the partner to contribute $0.4 million. There is
$10.2 million in debt on this garden apartment complex.
The occupancy at the Atlanta, GA complex increased from 96% at December 31, 1998
to 98% at December 31, 1999. Occupancy at the apartment complex in Raleigh, NC
decreased from 93% at December 31, 1998 to 92% at December 31, 1999. Occupancy
at the Jacksonville, FL apartment complex was 89% at December 31, 1999. As of
December 31, 1999, all available vacant spaces were being marketed.
25-Real Property
Retail Property
Net investment income for the Partnership's retail property located in Roswell,
GA was approximately $2.7 million for the twelve months ended December 31, 1999
and 1998.
The retail property experienced a net unrealized loss of $1.8 million and $1.3
million in 1999 and 1998, respectively. The decrease in value in 1999 was
attributable to a declining position of the property in the market, while the
decrease in 1998 was a reflection of lower rents. The complex is no longer being
actively marketed for sale.
On September 30, 1999, the Partnership invested in a retail portfolio located in
the Kansas City, KS and Kansas City, MO area. This joint venture investment
required the Partnership to contribute $5.1 million to the investment and the
partner to contribute $1.7 million. There is $21.0 million in debt on this
retail portfolio. During the twelve months ended December 31, 1999, income from
interest in this investment amounted to $98,375. This investment experienced a
net unrealized loss in 1999 of $0.6 million primarily due to capital
expenditures on the property that were not reflected as an increase in market
value.
Occupancy at the shopping center located in Roswell, GA decreased from 98% at
December 31, 1998 to 97% at December 31, 1999. The retail portfolio located in
Kansas City, KS and Kansas City, MO had an average occupancy of 90% at December
31, 1999. As of December 31, 1999, all vacant spaces were being marketed.
Industrial Properties
Net investment income from property operations for the industrial properties
decreased from $1.3 million in 1998 to $0.9 million in 1999. The majority of
this 32.5% decrease was a result of the sale of Pomona Industrial Park,
including the land, offset by an increase in net investment income for the
industrial properties located in Aurora, CO and Salt Lake City, UT due to
increased occupancy.
The three industrial properties owned by the Partnership experienced a net
unrealized gain of approximately $210,000 and $334,000 in 1999 and 1998,
respectively. The majority of the increase for 1999 was attributable to the
Aurora, CO industrial property due to improved market conditions, higher market
rental rates, and the absorption of vacant space. The Pomona, CA property was
sold on December 17, 1998 for $21.4 million and resulted in a realized gain of
$1.2 million.
The occupancy at the Bolingbrook, IL property was 100% at December 31, 1999 and
1998. The occupancy at the Salt Lake City, Utah property increased to 34% at
December 31, 1999 from 0% at December 31, 1998. The Aurora, CO property's
occupancy rate increased from 46% at December 31, 1998 to 75% at December 31,
1999. As of December 31, 1999, all vacant spaces were being marketed.
Equity in Income of Real Estate Partnership
On September 30, 1999, the Partnership invested in a retail portfolio located in
the Kansas City, MO area. This joint venture investment required the Partnership
to contribute $5.1 million to the investment and the partner to contribute $1.7
million. There is $21.0 million in debt on this retail portfolio. During the
twelve months ended December 31, 1999, income from interest in this investment
amounted to $98,375. This investment experienced a net unrealized loss in 1999
of $0.7 million primarily due to capital expenditures on the property that were
not reflected as an increase in market value.
The retail portfolio located in Kansas City, MO and Kansas City, KS had an
average occupancy of 90% at December 31, 1999. As of December 31, 1999, all
vacant spaces were being marketed.
Real Estate Investment Trusts
During 1999, the Partnership recognized a realized gain of $401,713 from the
conversion of 506,894 shares of Meridian REIT to 557,583 shares of ProLogis
REIT. This was offset by a realized loss of $478,497 primarily as a result of
the sale of 171,375 ProLogis REIT shares and other investments in REIT stocks.
Management continued applying a 3% discount to the market value of the ProLogis
REIT shares through June 29, 1999 because of a restriction which limits the
number of shares that can be publicly traded during any six month
26-Real Property
period. The application of the 3% discount was discontinued on June 30, 1999
because this restriction no longer applied.
Other
Other net investment income decreased $0.6 million during 1999 when compared to
the corresponding period in 1998. Other net investment income includes interest
income from short-term investments, investment management fees, and expenses not
related to property activities.
Information Concerning Forward-Looking Statements
Certain of the statements contained in Management's Discussion and Analysis may
be considered forward-looking statements. Words such as "expects," "believes,"
"anticipates," "intends," "plans," or variations of such words are generally
part of forward-looking statements. Forward-looking statements are made based
upon management's current expectations and beliefs concerning future
developments and their potential effects upon the Partnership. There can be no
assurance that future developments affecting the Partnership will be those
anticipated by management. There are certain important factors that could cause
actual results to differ materially from estimates or expectations reflected in
such forward-looking statements including without limitation, changes in general
economic conditions, including the performance of financial markets and interest
rates; market acceptance of new products and distribution channels; competitive,
regulatory or tax changes that affect the cost or demand for the Partnership's
products; and adverse litigation results. While the Partnership reassesses
material trends and uncertainties affecting its financial position and results
of operations, it does not intend to review or revise any particular
forward-looking statement referenced in this Management's Discussion and
Analysis in light of future events. The information referred to above should be
considered by readers when reviewing any forward-looking statements contained in
this Management's Discussion and Analysis.
Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk. The Partnership's exposure to market rate risk for changes
in interest rates relates to about 12% of its investment portfolio consisting
primarily of short-term fixed rate commercial paper and variable interest rate
debt. The Partnership does not use derivative financial instruments. By policy,
the Partnership places its investments with high quality debt security issuers,
limits the amount of credit exposure to any one issuer, limits duration by
restricting the term, and holds investments to maturity except under rare
circumstances.
The table below presents the amounts and related weighted interest rates of the
Partnership's cash equivalents and short-term investments at December 31, 2000:
Estimated Market Value Average
Maturity (in $ millions) Interest Rate
------------------------ ------------------------ -------------------------------------
Cash equivalents 0-3 months $8.9 6.55%
Short-term investments 3-12 months $4.9 6.57%
The table below discloses the Partnership's variable rate debt as of December
31, 2000. The interest rate on the debt is equal to the 6-month Treasury rate
plus 1.565%. It is subject to a maximum of 11.345% and a minimum of 2.345%. The
interest rate on the variable rate debt as of December 31, 2000 was 7.915%.
Debt (in $ thousands), Estimated Fair
including current portion 2001 2002 2003 2004 2005 Thereafter Total Value
- ------------------------- ---- ---- ---- ---- ---- ---------- ----- -----
Variable Rate $83 $90 $98 $104 $114 $9,603 $10,092 $10,092
While the Partnership has not experienced any significant credit losses, in the
event of a significant rising interest rate environment and/or economic
downturn, defaults could increase and result in losses to the Partnership which
adversely affect its operating results and liquidity.
27-Real Property
FINANCIAL STATEMENTS
Following are financial statements and independent accountant's reports of the
Real Property Account, as well as financial statements and independent
accountant's reports of the Partnership.
28-Real Property
FINANCIAL STATEMENTS OF
PRUCO LIFE VARIABLE CONTRACT REAL PROPERTY ACCOUNT
STATEMENTS OF NET ASSETS
December 31, 2000 and 1999
2000 1999
------------ ------------
ASSETS
Investment in The Prudential Variable Contract
Real Property Partnership (Note 3) $112,527,164 $117,725,227
------------ ------------
Net Assets $112,527,164 $117,725,227
============ ============
NET ASSETS, representing:
Equity of contract owners (Note 4) $ 78,534,051 $ 79,329,065
Equity of Pruco Life Insurance Company (Note 2D) 33,993,113 38,396,162
------------ ------------
$112,527,164 $117,725,227
============ ============
STATEMENTS OF OPERATIONS
For the years ended December 31, 2000, 1999 and 1998
2000 1999 1998
------------- ------------- -------------
INVESTMENT INCOME
Net investment income from Partnership operations $ 7,521,480 $ 7,491,106 $ 7,897,240
------------- ------------- -------------
EXPENSES
Charges to contract owners for assuming mortality risk and
expense risk and for administration (Note 5) 481,819 514,519 540,830
------------- ------------- -------------
NET INVESTMENT INCOME 7,039,661 6,976,587 7,356,410
------------- ------------- -------------
NET REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS
Net change in unrealized gain (loss) on investments in Partnership 978,929 (3,986,964) 869,718
Realized gain (loss) on sale of investments in Partnership 1,458,147 (18,696) 1,521,928
------------- ------------- -------------
NET GAIN (LOSS) ON INVESTMENTS 2,437,076 (4,005,660) 2,391,646
------------- ------------- -------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ 9,476,737 $ 2,970,927 $ 9,748,056
============= ============= =============
STATEMENTS OF CHANGES IN NET ASSETS
For the years ended December 31, 2000, 1999, and 1998
2000 1999 1998
------------- ------------- -------------
OPERATIONS
Net investment income $ 7,039,661 $ 6,976,587 $ 7,356,410
Net change in unrealized gain (loss) on investments in Partnership 978,929 (3,986,964) 869,718
Net realized gain (loss) on sale of investments in Partnership 1,458,147 (18,696) 1,521,928
------------- ------------- -------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS 9,476,737 2,970,927 9,748,056
------------- ------------- -------------
CAPITAL TRANSACTIONS
Net withdrawals by contract owners (Note 7) (7,012,328) (9,241,552) (6,634,732)
Net contributions (withdrawals) by Pruco Life Insurance Company (7,662,472) 4,211,673 7,175,562
------------- ------------- -------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM CAPITAL TRANSACTIONS (14,674,800) (5,029,879) 540,830
------------- ------------- -------------
TOTAL INCREASE (DECREASE) IN NET ASSETS (5,198,063) (2,058,952) 10,288,886
NET ASSETS
Beginning of year 117,725,227 119,784,179 109,495,293
------------- ------------- -------------
End of year $ 112,527,164 $ 117,725,227 $ 119,784,179
============= ============= =============
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A2 THROUGH A6
A1-Real Property
NOTES TO THE FINANCIAL STATEMENTS OF
PRUCO LIFE VARIABLE CONTRACT REAL PROPERTY ACCOUNT
December 31, 2000
Note 1: General
Pruco Life Variable Contract Real Property Account (the "Real Property Account")
was established on August 27, 1986 and commenced business September 5, 1986.
Pursuant to Arizona law, the Real Property Account was established as a separate
investment account of Pruco Life Insurance Company ("Pruco Life"), a
wholly-owned subsidiary of The Prudential Insurance Company of America
("Prudential"). The assets of the Real Property Account are segregated from
Pruco Life's other assets. The Real Property account is used to fund benefits
under certain variable life insurance and variable annuity contracts issued by
Pruco Life. These products are Appreciable Life ("VAL"), Variable Life ("VLI"),
Discovery Plus ("SPVA"), and Discovery Life Plus ("SPVL").
The assets of the Real Property Account are invested in The Prudential Variable
Contract Real Property Partnership (the "Partnership"). The Partnership is
organized under New Jersey law and is registered under the Securities Act of
1933. The Partnership is the investment vehicle for assets allocated to the real
estate investment option under certain variable life insurance and annuity
contracts. The Real Property Account, along with The Prudential Variable
Contract Real Property Account and the Pruco Life of New Jersey Variable
Contract Real Property Account, are the sole investors in the Partnership.
The Partnership has a policy of investing at least 65% of its assets in direct
ownership interests in income-producing real estate and participating mortgage
loans.
Note 2: Summary of Significant Accounting Policies
A. Basis of Accounting
The accompanying financial statements are prepared in conformity with accounting
principles generally accepted in the United States ("GAAP"). The preparation of
the financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect the reported amounts and disclosures.
Actual results could differ from those estimates.
B. Investment in Partnership Interest
The investment in the Partnership is based on the Real Property Account's
proportionate interest of the Partnership's market value. At December 31, 2000
and 1999 the Real Property Account's interest in the Partnership was 54.5% or
4,949,340 shares and 56.0% or 5,644,214 shares respectively.
C. Income Recognition
Net investment income and realized and unrealized gains and losses are
recognized daily. Amounts are based upon the Real Property Account's
proportionate interest in the Partnership.
D. Equity of Pruco Life Insurance Company
Pruco Life maintains a position in the Real Property Account for property
acquisitions and capital expenditure funding needs. The position is also
utilized for liquidity purposes including unit purchases and redemptions,
Partnership share transactions, and expense processing. The position does not
have an effect on the contract owner's account or the related unit value.
A2-Real Property
Note 3: Investment Information for The Prudential Variable Contract Real
Property Partnership
The number of shares (rounded) held by the Real Property Account in the
Partnership, the Partnership net asset value per share (rounded) and the
aggregate cost of investments in the Real Property Accounts' shares held at
December 31, 2000 and December 31, 1999 were as follows:
December 31, 2000 December 31, 1999
----------------- -----------------
Number of Shares (rounded): 4,949,340 5,644,214
Net Asset Value per Share (rounded): $22.74 $20.86
Cost: $53,466,976 $60,925,820
Note 4: Contract Owner Unit Information
Outstanding contract owner units, unit values and total value of contract owner
equity at December 31, 2000 and December 31, 1999 by product, were as follows:
2000:
VAL VLI SPVA SPVL TOTAL
----------- ---------- ---------- ---------- -----------
Contract Owner Units Outstanding: 32,946,644 2,381,202 260,656 2,121,822
Unit Value: $ 2.08939 $ 2.16437 $ 1.90636 $ 1.90636
----------- ---------- ---------- ----------
Total Contract Owner Equity: $68,838,388 $5,153,802 $ 496,904 $4,044,957 $78,534,051
=========== ========== ========== ========== ===========
1999:
VAL VLI SPVA SPVL TOTAL
----------- ---------- ---------- ---------- -----------
Contract Owner Units Outstanding: 36,089,648 2,473,532 304,137 2,412,590
Unit Value: $ 1.92825 $ 1.99254 $ 1.77073 $ 1.77073
----------- ---------- ---------- ----------
Total Contract Owner Equity: $69,589,863 $4,928,611 $ 538,545 $4,272,046 $79,329,065
=========== ========== ========== ========== ===========
Note 5: Charges and Expenses
A. Mortality Risk and Expense Risk Charges
Mortality risk and expense risk charges are determined daily using an effective
annual rate of 0.6%, 0.35%, 0.9% and 0.9% for VAL, VLI, SPVA, SPVL,
respectively. Mortality risk is that life insurance contract owners may not live
as long as estimated or annuitants may live longer than estimated and expense
risk is that the cost of issuing and administering the policies may exceed
related charges by Pruco Life.
B. Administrative Charges
Administrative charges are determined daily using an effective annual rate of
0.35% applied daily against the net assets representing equity of contract
owners held in each subaccount for SPVA and SPVL. Administrative charges include
costs associated with issuing the contract, establishing and maintaining
records, and providing reports to contract owners.
C. Cost of Insurance and Other Related Charges
Contract owner contributions are subject to certain deductions prior to being
invested in the Real Property Account. The deductions for VAL and VLI are (1)
state premium taxes; (2) sales charges which are deducted in order to compensate
Pruco Life for the cost of selling the contract and (3) transaction costs,
applicable to VAL, are deducted from each premium payment to cover premium
collection and processing costs. Contracts are also subject to monthly charges
for the costs of administering the contract to compensate Pruco Life the
guaranteed minimum death benefit risk.
A3-Real Property
D. Deferred Sales Charge
A deferred sales charge is imposed upon the surrender of certain variable life
insurance contracts to compensate Pruco Life for sales and other marketing
expenses. The amount of any sales charge will depend on the number of years that
have elapsed since the contract was issued. No sales charge will be imposed
after the sixth and tenth year of the contract for SPVL and VAL, respectively.
No sales charge will be imposed on death benefits.
E. Partial Withdrawal Charge
A charge is imposed by Pruco Life on partial withdrawals of the cash surrender
value for VAL. A charge equal to the lesser of $15 or 2% will be made in
connection with each partial withdrawal of the cash surrender value of a
contract.
Note 6: Taxes
Pruco Life is taxed as a "life insurance company" as defined by the Internal
Revenue Code. The results of operations of the Real Property Account form a part
of Prudential's consolidated federal tax return. Under current federal law, no
federal income taxes are payable by the Real Property Account. As such, no
provision for the tax liability has been recorded in these financial statements.
Note 7: Net Withdrawals by Contract Owners
Contract owner activity for the real estate investment option in Pruco Life's
variable insurance and variable annuity products for the years ended December
31, 2000, 1999 and 1998 were as follows:
2000:
VAL VLI SPVA SPVL TOTAL
----------- ----------- ----------- ----------- -----------
Contract Owner Net Payments: $ 4,470,287 $ 397,335 $ 0 $ (61) $ 4,867,561
Policy Loans: (2,018,495) (73,712) 0 (77,275) (2,169,482)
Policy Loan Repayments and Interest: 1,849,555 72,675 0 152,141 2,074,371
Surrenders, Withdrawals, and Death Benefits: (4,314,085) (266,353) (70,733) (401,369) (5,052,540)
Net Transfers To Other Subaccounts
or Fixed Rate Option: (3,377,546) (145,822) (7,622) (171,284) (3,702,274)
Administrative and Other Charges: (2,823,304) (176,525) (65) (30,070) (3,029,964)
----------- ----------- ----------- ----------- -----------
Net Withdrawals by Contract Owners $(6,213,588) $ (192,402) $ (78,420) $ (527,918) $(7,012,328)
=========== =========== =========== =========== ===========
1999:
VAL VLI SPVA SPVL TOTAL
----------- ----------- ----------- ----------- -----------
Contract Owner Net Payments: $ 1,995,536 $ 219,516 $ 0 $ (191,413) $ 2,023,639
Policy Loans: (2,274,300) (57,385) 0 (173,486) (2,505,171)
Policy Loan Repayments and Interest: 2,233,905 112,386 0 125,962 2,472,253
Surrenders, Withdrawals, and Death Benefits: (4,042,390) (360,063) (391,563) (360,393) (5,154,409)
Net Transfers To Other Subaccounts
or Fixed Rate Option: (2,391,648) (88,091) (13,158) (260,510) (2,753,407)
Administrative and Other Charges: (3,107,932) (181,336) (631) (34,558) (3,324,457)
----------- ----------- ----------- ----------- -----------
Net Withdrawals by Contract Owners $(7,586,829) $ (354,973) $ (405,352) $ (894,398) $(9,241,552)
=========== =========== =========== =========== ===========
A4-Real Property
1998:
VAL VLI SPVA SPVL TOTAL
----------- ----------- ----------- ----------- -----------
Contract Owner Net Payments: $ 5,904,685 $ 480,512 $ 0 $ 0 $ 6,385,197
Policy Loans: (2,370,550) (105,592) 0 (188,675) (2,664,817)
Policy Loan Repayments and Interest: 1,807,322 81,893 0 219,707 2,108,922
Surrenders, Withdrawals, and Death Benefits: (4,498,494) (335,108) (350,787) (391,714) (5,576,103)
Net Transfers From(To) Other Subaccounts
or Fixed Rate Option: (2,987,279) (130,821) 7,921 (106,815) (3,216,994)
Administrative and Other Charges: (3,441,506) (191,621) (383) (37,427) (3,670,937)
----------- ----------- ----------- ----------- -----------
Net Withdrawals by Contract Owners $(5,585,822) $ (200,737) $ (343,249) $ (504,924) $(6,634,732)
=========== =========== =========== =========== ===========
Note 8: Unit Activity
Transactions in units for the years ended December 31, 2000, 1999 and 1998 were
as follows:
2000:
VAL VLI SPVA SPVL
--- --- ---- ----
Contract Owner Contributions: 2,890,088 216,712 13 72,083
Contract Owner Redemptions: (6,033,101) (308,808) (43,495) (332,800)
1999:
VAL VLI SPVA SPVL
--- --- ---- ----
Contract Owner Contributions: 2,204,016 176,055 127 (35,621)
Contract Owner Redemptions: (6,191,501) (356,390) (230,588) (475,343)
1998:
VAL VLI SPVA SPVL
--- --- ---- ----
Contract Owner Contributions: 4,541,673 315,299 13,026 154,339
Contract Owner Redemptions: (7,665,746) (423,732) (222,520) (462,608)
Note 9: Purchases and Sales of Investments
The aggregate costs of purchases and proceeds from sales of investments in the
Partnership for the year ended December 31, 2000 were as follows:
Purchases: $ 0
Sales: $ (15,156,619)
A5-Real Property
Report of Independent Accountants
To the Contract Owners of the
Pruco Life Variable Contract Real Property Account
And the Board of Directors of
Pruco Life Insurance Company
In our opinion, the accompanying statements of net assets and the related
statements of operations and of changes in net assets present fairly, in all
material respects, the financial position of Pruco Life Variable Contract Real
Property Account at December 31, 2000, and the results of each of their
operations and the changes in each of their net assets for each of the three
years in the period then ended, in conformity with accounting principles
generally accepted in the United States of America. These financial statements
are the responsibility of the management of the Pruco Life Insurance Company;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these financial statements in
accordance with auditing standards generally accepted in the United States of
America, which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of shares at December 31, 2000 for The
Prudential Variable Contract Real Property Partnership, provide a reasonable
basis for our opinion.
PricewaterhouseCoopers LLP
New York, New York
March 30, 2001
A6-Real Property
INDEX
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
FINANCIAL STATEMENTS
Consolidated Statements of Assets and Liabilities -
December 31, 2000 and 1999 B1
Consolidated Statements of Operations -
Years Ended December 31, 2000, 1999, and 1998 B2
Consolidated Statements of Changes in New Assets -
Years Ended December 31, 2000, 1999, and 1998 B3
Consolidated Statements of Cash Flows -
Years Ended December 31, 2000, 1999, and 1998 B4
Schedule of Investments - December 31, 2000 and 1999 B5
Notes to Financial Statements B10
Report of Independent Accountants B16
INDEX-Real Property
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES
December 31, 2000 December 31, 1999
----------------- -----------------
ASSETS
REAL ESTATE INVESTMENTS - At estimated market value:
Real estate and improvements
(cost: 12/31/2000 -- $173,748,950; 12/31/1999 -- $190,007,568) $162,213,095 $171,154,516
Real estate partnership (cost: 12/31/2000 -- $5,985,783;
12/31/1999 -- $5,187,126) 5,445,528 4,506,257
Real estate investment trusts (cost: 12/31/2000 -- $31,896,908;
12/31/1999 -- $32,535,158) 35,224,737 29,727,085
------------ ------------
Total real estate investments 202,883,360 205,387,858
MARKETABLE SECURITIES - At estimated market value
(cost: 12/31/2000 -- $4,916,327; 12/31/1999 -- $2,805,493) 4,916,494 $2,797,008
CASH AND CASH EQUIVALENTS 10,543,821 13,972,669
DIVIDEND RECEIVABLE 242,341 131,542
OTHER ASSETS (net of allowance for uncollectible
accounts: 12/31/2000 -- $91,000; 12/31/1999 -- $179,000) 2,926,280 2,853,576
------------ ------------
Total assets 221,512,296 225,142,653
------------ ------------
LIABILITIES
MORTGAGE LOAN PAYABLE 10,092,355 10,184,662
ACCOUNTS PAYABLE AND ACCRUED EXPENSES 2,517,818 2,967,614
DUE TO AFFILIATES 887,434 869,477
OTHER LIABILITIES 669,209 525,892
MINORITY INTEREST 997,401 372,068
------------ ------------
Total liabilities 15,164,217 14,919,713
------------ ------------
PARTNERS' EQUITY 206,348,079 210,222,940
------------ ------------
Total liabilities and partners' equity $221,512,296 $225,142,653
============ ============
NUMBER OF SHARES OUTSTANDING AT END OF PERIOD 9,075,913 10,078,921
============ ============
SHARE VALUE AT END OF PERIOD $22.74 $20.86
============ ============
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES B10 THROUGH B15
B1-Real Property
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31,
--------------------------------------------
2000 1999 1998
------------ ------------ ------------
INVESTMENT INCOME:
Revenue from real estate and improvements $22,570,851 $21,807,346 $24,572,642
Equity in income of real estate partnership 791,596 98,375 33,462
Dividend Income 1,744,611 1,221,843 669,100
Interest on short-term investments 1,280,880 1,707,485 1,888,348
------------ ------------ ------------
Total investment income 26,387,938 24,835,049 27,163,552
------------ ------------ ------------
EXPENSES:
Investment management fee 2,705,589 2,730,713 2,900,445
Real estate taxes 2,498,065 2,616,553 2,406,624
Administrative 2,411,390 2,234,949 1,951,235
Operating 4,390,001 3,794,081 4,071,735
Interest 732,991 145,418 0
Minority interest 11,785 33,746 0
------------ ------------ ------------
Total investment expenses 12,749,821 11,555,460 11,330,039
------------ ------------ ------------
NET INVESTMENT INCOME 13,638,117 13,279,589 15,833,513
------------ ------------ ------------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Net proceeds from real estate investments
sold 46,617,017 21,649,562 37,443,762
Less: Cost of real estate investments sold 55,269,357 19,602,032 37,361,533
Realization of prior years' unrealized
(loss) gain on real estate investments sold (11,296,284) 2,080,673 (2,969,150)
------------ ------------ ------------
Net gain (loss) realized on real estate
investments sold 2,643,944 (33,143) 3,051,379
------------ ------------ ------------
Change in unrealized gain (loss) on real estate
investments 2,297,429 (7,145,372) 1,743,732
Minority interest in unrealized gain on investments (454,351) (38,531) 0
------------ ------------ ------------
Net unrealized gain (loss) on real estate investments 1,843,078 (7,183,903) 1,743,732
------------ ------------ ------------
NET REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS 4,487,022 (7,217,046) 4,795,111
------------ ------------ ------------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS $18,125,139 $6,062,543 $20,628,624
============ ============ ============
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES B10 THROUGH B15
B2-Real Property
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS
Year Ended December 31,
----------------------------------------------
2000 1999 1998
------------- ------------- ------------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS:
Net investment income $13,638,117 $13,279,589 $15,833,513
Net gain (loss) realized on real estate
investments sold 2,643,944 (33,143) 3,051,379
Net unrealized gain (loss) from real estate
investments 1,843,078 (7,183,903) 1,743,732
------------- ------------- ------------
Net increase in net assets resulting from
operations 18,125,139 6,062,543 20,628,624
------------- ------------- ------------
NET DECREASE IN NET ASSETS RESULTING
FROM CAPITAL TRANSACTIONS:
Withdrawals by partners
(2000 -- 1,003,008, 1999 -- 1,769,354, and
1998 -- 0 shares, respectively) (22,000,000) (36,000,000) 0
------------- ------------- ------------
Net decrease in net assets resulting from
capital transactions (22,000,000) (36,000,000) 0
------------- ------------- ------------
NET (DECREASE) INCREASE IN NET ASSETS (3,874,861) (29,937,457) 20,628,624
NET ASSETS - Beginning of year 210,222,940 240,160,397 219,531,773
------------- ------------- ------------
NET ASSETS - End of year $206,348,079 $210,222,940 $240,160,397
============= ============= ============
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES B10 THROUGH B15
B3-Real Property
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
--------------------------------------------
2000 1999 1998
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net increase in net assets resulting from operations $18,125,139 $6,062,543 $20,628,624
Adjustments to reconcile net increase in net assets
resulting from operations to net cash provided by
operating activities:
Net realized and unrealized loss (gain) on
investments (4,487,022) 7,217,046 (4,795,111)
Equity in income of real estate partnership's
operations in excess of distributions (791,596) (98,376) 0
Minority interest from operating activities 11,785 33,746 0
Bad debt expense 96,785 124,059 28,264
Decrease (increase) in:
Dividend receivable (110,799) 35,733 (20,276)
Other assets (169,489) 645,878 (1,704,926)
(Decrease) increase in:
Accounts payable and accrued expenses (449,796) 982,214 143,373
Due to affiliates 17,957 (729,058) 765,613
Other liabilities 143,316 20,952 (33,473)
------------ ------------ ------------
Net cash flows from operating activities 12,386,280 14,294,737 15,012,088
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net proceeds from real estate investments sold 46,617,017 10,706,996 37,443,762
Acquisition of real estate property 0 (7,200,743) 0
Acquisition of real estate partnership 0 (5,088,750) 0
Acquisition of real estate investment trust (34,157,332) (31,239,744) 0
Improvements and additional costs on prior purchases:
Additions to real estate property (4,215,157) (2,516,645) (5,736,333)
Additions to real estate partnership (7,060) 0 0
Sale (purchase) of marketable securities, net (2,119,486) 12,153,517 (1,021,229)
------------ ------------ ------------
Net cash flows from investing activities 6,117,982 (23,185,369) 30,686,200
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Withdrawals by partners (22,000,000) (36,000,000) 0
Principal payments on mortgage loans payable (92,307) (15,338) 0
Distributions to minority interest partners 0 (93,425) 0
Contributions from minority interest partners 159,197 393,216 0
------------ ------------ ------------
Net cash flows from financing activities (21,933,110) (35,715,547) 0
------------ ------------ ------------
NET CHANGE IN CASH AND CASH
EQUIVALENTS (3,428,848) (44,606,179) 45,698,288
CASH AND CASH EQUIVALENTS - Beginning of year 13,972,669 58,578,848 12,880,560
------------ ------------ ------------
CASH AND CASH EQUIVALENTS - End of year $10,543,821 $13,972,669 $58,578,848
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the year for interest $732,991 $145,418 $0
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF NON-CASH
INVESTING ACTIVITY:
Assumption of Mortgage Loan Payable $0 $10,200,000 $0
============ ============ ============
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES B10 THROUGH B15
B4-Real Property
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
SCHEDULE OF INVESTMENTS
December 31, 2000 December 31, 1999
-------------------------------------- ---------------------------------
Estimated Estimated
Market Market
Cost Value Cost Value
-----------------------------------------------------------------------------
REAL ESTATE AND IMPROVEMENTS (Percent of Net Assets) 78.6% 81.4%
Location Description
- ------------------------------------------------------------------------------------------------------------------------------------
Lisle, IL Office Building $ 22,267,422 $ 14,134,722 $ 22,075,782 $ 13,895,122
Atlanta, GA Garden Apartments 15,667,354 17,800,002 15,646,846 16,104,268
Roswell, GA Retail Shopping Center 32,533,052 26,874,838 32,394,853 27,000,939
Morristown, NJ Office Building 0 0 20,116,694 12,337,499
Bolingbrook, IL Warehouse 9,012,838 6,664,810 8,948,028 7,000,000
Raleigh, NC Garden Apartments 15,847,460 17,200,000 15,833,928 17,004,623
Brentwood, TN Office Building 9,657,787 10,396,565 8,509,908 10,000,000
Oakbrook Terrace, IL Office Complex 13,021,251 12,716,910 12,945,366 14,200,000
Beaverton, OR Office Complex 11,225,040 10,623,809 10,768,811 10,400,866
Salt Lake City, UT Industrial Building 5,640,709 5,900,050 5,640,709 5,703,419
Aurora, CO Industrial Building 10,131,358 9,800,714 10,119,072 10,520,780
Brentwood, TN Office Complex 9,609,133 9,600,675 9,606,828 9,537,000
Jacksonville, FL Garden Apartments 19,135,546 20,500,000 17,400,743 17,450,000
------------
Total Real Estate and Improvements $173,748,950 $162,213,095 $190,007,568 $171,154,516
==============================================================================
REAL ESTATE PARTNERSHIP (Percent of Net Assets) 2.6% 2.1%
Location Description
- ------------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------
Kansas City, KS; MO Retail Shopping Center $ 5,985,783 $ 5,445,528 $ 5,187,126 $ 4,506,257
==============================================================================
* Real estate partnership accounted for by the consolidated method.
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES B10 THROUGH B15
B5-Real Property
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
SCHEDULE OF INVESTMENTS
December 31, 2000
------------------------------------------
Estimated
Market
Cost Value
------------------------------------------
REAL ESTATE INVESTMENT TRUSTS (Percent of Net Assets) 17.1%
----------------------------------------------------------------------------------------------------------
Alexandria Real Est Equities (5,000 shares) $ 181,188 $ 185,938
AMB Property Corporation (30,000 shares) 706,770 774,375
AMLI Residential Properties (30,000 shares) 706,800 740,625
Apartment Inv & Mgmt Co, Class A (28,900 shares) 1,218,828 1,443,194
Archstone Communities Trust (25,000 shares) 592,188 643,750
Avalonbay Communities Inc (15,000 shares) 683,900 751,875
Boston Properties Inc (25,000 shares) 995,339 1,087,500
Brandywine Realty Trust (15,000 shares) 321,338 310,313
CBL & Associates Prop (30,800 shares) 741,988 779,625
Cabot Industrial Trust (40,000 shares) 820,726 767,500
Centerpoint Properties Corp. (18,600 shares) 632,302 878,850
Cousins Properties (20,000 shares) 551,200 558,750
Crescent Real Estate Eqt Co (25,000 Shares) 565,563 556,250
Duke - Weeks Realty Corporation (47,000 shares) 1,070,320 1,157,375
Equity Office Properties Trust (77,400 shares) 2,215,533 2,525,175
Equity Residential Property Trust (30,000 shares) 1,450,732 1,659,375
Essex Property Trust, Inc (15,000 shares) 593,700 821,250
First Industrial Realty Trust (25,000 shares) 781,100 850,000
Franchise Finance Cp Amer (51,300 shares) 1,228,281 1,195,931
Gables Residential Trust (25,000 shares) 632,750 700,000
General Growth Properties (22,000 shares) 714,894 796,125
Highwoods Properties Inc (30,000 shares) 758,832 746,250
Host Marriot Corp (105,000 shares) 1,114,575 1,358,438
Innkeepers USA Trust (50,000 shares) 512,375 553,125
IRT Property (45,000 shares) 406,395 365,625
Kilroy Realty Corp. (30,000 shares) 746,886 856,875
Kimco Realty (15,000 shares) 612,612 662,813
Liberty Property LP (35,000 shares) 899,563 999,688
Macerich Co (30,000 shares) 670,490 575,625
MeriStar Hospitality Corp (37,500 shares) 636,151 738,281
Mission West Properties (88,200 shares) 697,122 1,223,775
Parkway Properties Inc (25,000 shares) 782,750 742,188
Public Storage Inc (5,000 shares) 113,763 121,563
Reckson Assoc Realty Corp. (32,500 shares) 805,150 814,531
Regency Realty Corp (25,000 shares) 576,600 592,188
Saul Centers Inc (1,700 shares) 29,085 31,663
Shurgard Storage Centers (20,000 shares) 478,500 488,750
Simon Property Group Inc (45,000 shares) 1,032,357 1,080,000
Spieker Properties (27,000 shares) 1,197,078 1,353,375
Summit Properties Inc (12,000 shares) 292,832 312,000
Vornado Realty Trust (29,800 shares) 1,028,569 1,141,713
Washington Reit (40,000 shares) 759,220 945,000
Public Storage Inc, Preferred Stock (15,000 shares) 340,569 337,500
---------------------------------------------
Total Real Estate Investment Trusts $31,896,908 $35,224,737
=============================================
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES B10 THROUGH B15
B6-Real Property
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
SCHEDULE OF INVESTMENTS
December 31, 1999
--------------------------------------------
Estimated
Market
Cost Value
--------------------------------------------
REAL ESTATE INVESTMENT TRUSTS (Percent of Net Assets) 14.1%
- ----------------------------------------------------------------------------------------------------------------------
Prologis REIT Shares (386,208 shares) $ 7,579,332 $ 7,434,504
AMB Property Corp (42,100 shares) 933,851 839,369
Alexandria Real Est Equities (30,800 shares) 874,221 979,825
Apartment Inv & Mgmt Co - Class A (16,500 shares) 672,953 656,906
Centerpoint Properties Corp (16,200 shares) 544,308 581,175
Cousins Properties (24,800 shares) 890,459 841,650
Equity Office Properties Trust (32,400 shares) 901,571 797,850
Equity Residential Property Trust (13,100 shares) 623,573 559,206
Excel Legacy Corp (322,300 shares) 1,479,431 1,067,619
Franchise Finance Cp Amer (25,500 shares) 620,027 610,406
General Growth Properties (13,600 shares) 512,353 380,800
Intrawest Corporation (76,100 shares) 1,258,575 1,317,481
MeriStar Hotels & Resorts Inc. (239,100 shares) 875,818 851,794
Mission West Properties (116,800 shares) 938,124 905,200
Philips International Realty (63,700 shares) 1,052,331 1,047,069
Prime Hospitality Corp. (112,500 shares) 1,320,524 991,406
Public Storage (45,100 shares) 1,269,884 1,023,206
Reckson Service Industries (18,200 shares) 221,041 1,135,225
Reckson Assoc Realty Corp (52,200 shares) 1,299,227 1,070,100
Spieker Properties (12,000 shares) 426,078 437,250
Starwood Hotels and Resorts (87,200 shares) 3,027,806 2,049,200
Sun Communities Inc. (16,700 shares) 606,047 537,531
Vornado Realty Trust (51,800 shares) 1,930,911 1,683,500
Sun International Hotels Ltd (30,900 shares) 1,116,266 598,688
Boardwalk Equities, Inc. (146,800 shares) 1,560,447 1,330,125
--------------------------------------------
Total Real Estate Investment Trusts $32,535,158 $29,727,085
============================================
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES B10 THROUGH B15
B7-Real Property
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
SCHEDULE OF INVESTMENTS
December 31, 2000
----------------------------------------------------
Net Estimated
Face Amount Cost Market Value
--------------- --------------- ---------------
MARKETABLE SECURITIES (Percent of Net Assets) 2.4%
Associates First Capital B.V., 6.55%, January 29, 2001 699,000 687,681 687,681
New Center Asset Trust, 6.52%, January 30, 2001 1,614,000 1,587,692 1,587,692
Lasalle National Bank, 6.71%, February 1, 2001 969,000 968,792 968,959
B-One Australia Ltd., 6.55%, February 13, 2001 1,700,000 1,672,162 1,672,162
--------------- --------------- ---------------
Total Marketable Securities $ 4,982,000 $ 4,916,327 $ 4,916,494
=============== =============== ===============
CASH AND CASH EQUIVALENTS (Percent of Net Assets) 5.1%
J.P. Morgan & Co, 6.55%, January 2, 2001 $ 546,000 $ 545,603 $ 545,603
Alcoa Inc., 6.55%, January 4, 2001 634,000 633,193 633,193
Merrill Lynch & Co., 6.53%, Inc., January 10, 2001 300,000 299,347 299,347
Bankamerica Corp., 6.55%, January 11, 2001 680,000 678,020 678,020
General Motors Acceptance Corp., Inc., 6.60%, January 17, 2001 600,000 597,910 597,910
Paccar Financial Corp., 6.67%, January 18, 2001 661,000 657,693 657,693
General Electric Capital Corp., 6.55%, January 22, 2001 700,000 691,085 691,085
Countrywide Home Loans, 6.60%, January 25, 2001 560,000 556,201 556,201
Duke Energy Corp., 6.50%, January 25, 2001 682,000 678,552 678,552
Caterpillar Financial Svcs Corp., 6.50%, January 26, 2001 625,000 621,727 621,727
Verizon Global Funding Corp., 6.55%, January 26, 2001 500,000 496,179 496,179
Ciesco L.P., 6.54%, January 30, 2001 1,675,000 1,652,178 1,652,178
Eastman Kodak Co., 6.53%, February 9, 2001 800,000 787,230 787,230
--------------- --------------- ---------------
Total Cash Equivalents 8,963,000 8,894,919 8,894,919
Cash 1,648,902 1,648,902 1,648,902
--------------- --------------- ---------------
Total Cash and Cash Equivalents $10,611,902 $10,543,821 $10,543,821
=============== =============== ===============
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES B10 THROUGH B15
B8-Real Property
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
SCHEDULE OF INVESTMENTS
December 31, 1999
----------------------------------------------------
Net Estimated
Face Amount Cost Market Value
--------------- --------------- ---------------
MARKETABLE SECURITIES (Percent of Net Assets) 1.3%
J.P. Morgan and Co., Inc., 5.96%, March 13, 2000 $ 995,000 $ 980,010 $ 980,010
Ford Motor Credit Co., 7.50%, April 6, 2000 150,000 151,779 150,653
CIT Group Inc., 6.80%, April 17, 2000 500,000 503,765 501,487
Associates Corp of North America, 6.71%, June 1, 2000 1,160,000 1,169,939 1,164,858
--------------- --------------- ---------------
Total Marketable Securities $ 2,805,000 $ 2,805,493 $ 2,797,008
=============== =============== ===============
CASH AND CASH EQUIVALENTS (Percent of Net Assets) 6.6%
Duke Energy Corp., 5.00%, January 3, 2000 $ 550,000 $ 549,771 $ 549,771
Bell Atlantic Financial Services, 5.20%, January 7, 2000 672,000 671,321 671,321
Household Finance Corp, 5.93%, January 18, 2000 990,000 983,314 983,314
Ford Motor Credit Co., 6.00%, January 21, 2000 847,000 840,789 840,789
American Express Cr. Corp., 6.02%, January 26, 2000 999,000 990,981 990,981
Procter & Gamble Co., 6.00%, January 26, 2000 200,000 197,867 197,867
Goldman Sachs Group L.P., 6.43%, January 31, 2000 1,000,000 991,963 991,963
Countrywide Home Loans, 6.00%, February 3, 2000 990,000 980,595 980,595
Merrill Lynch & Co., Inc., 5.98%, February 3, 2000 990,000 980,626 980,626
Unifunding Inc., 6.05%, February 3, 2000 900,000 892,135 892,135
Metlife Funding Inc., 5.90%, February 4, 2000 841,000 832,730 832,730
General Electric Cap Corp., 5.95%, February 10, 2000 350,000 346,182 346,182
GTE Funding, Inc., 6.10%, February 10, 2000 1,000,000 990,681 990,681
E.I. Du Pont De Nemours & Co. Inc., 6.00%, February 11, 2000 250,000 246,667 246,667
General Electric Capital Corp., 5.92% March 1, 2000 406,000 400,258 400,258
--------------- --------------- ---------------
Total Cash Equivalents 10,985,000 10,895,880 10,895,880
Cash 3,076,789 3,076,789 3,076,789
--------------- --------------- ---------------
Total Cash and Cash Equivalents $14,061,789 $13,972,669 $13,972,669
=============== =============== ===============
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES B10 THROUGH B15
B9-Real Property
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF
PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
For Years Ended December 31, 2000, 1999, and 1998
Note 1: Organization
On April 29, 1988, The Prudential Variable Contract Real Property Partnership
(the "Partnership"), a general partnership organized under New Jersey law, was
formed through an agreement among The Prudential Insurance Company of America
("Prudential"), Pruco Life Insurance Company ("Pruco Life"), and Pruco Life
Insurance Company of New Jersey ("Pruco Life of New Jersey"). The Partnership
was established as a means by which assets allocated to the real estate
investment option under certain variable life insurance and variable annuity
contracts issued by the respective companies could be invested in a commingled
pool. The Partners in the Partnership are Prudential, Pruco Life and Pruco Life
of New Jersey.
The Partnership's policy is to invest at least 65% of its assets in direct
ownership interests in income-producing real estate and participating mortgage
loans.
The estimated market value of the Partnership's shares is determined daily,
consistent with the Partnership Agreement. On each day during which the New York
Stock Exchange is open for business, the net asset value of the Partnership is
estimated using the estimated market value of its assets, principally as
described in Notes 2A and 2B below, reduced by any liabilities of the
Partnership. The periodic adjustments to property values described in Notes 2A
and 2B below and other adjustments to previous estimates are made on a
prospective basis. There can be no assurance that all such adjustments to
estimates will be made timely.
Shares of the Partnership are held by The Prudential Variable Contract Real
Property Account, Pruco Life Variable Contract Real Property Account and Pruco
Life of New Jersey Variable Contract Real Property Account (the "Real Property
Accounts") and may be purchased and sold at the then current share value of the
Partnership's net assets. Share value is calculated by dividing the estimated
market value of net assets of the Partnership as determined above by the number
of shares outstanding. A contract owner participates in the Partnership through
interests in the Real Property Accounts.
Prudential Real Estate Investors ("PREI") is part of the Prudential Global Asset
Management unit (`PGAM") and is a division of Prudential Investment Corp. PREI
provides investment advisory services to the Partnership's Partners pursuant to
the terms of the Advisory Agreement.
Note 2: Summary Of Significant Accounting Policies
A: Basis of Presentation - The accompanying consolidated financial
statements are presented on the accrual basis of accounting. It is the
Partnership's policy to consolidate those real estate partnerships in
which it has a controlling financial interest. All significant
intercompany balances and transactions have been eliminated in the
consolidation.
B: Real Estate Investments - The Partnership's investments in real estate
are initially valued at their purchase price. Thereafter, real estate
investments are reported at their estimated market values based upon
appraisal reports prepared by independent real estate appraisers
(members of the Appraisal Institute or an equivalent organization)
within a reasonable amount of time following acquisition of the real
estate and no less frequently than annually thereafter. The Chief Real
Estate Appraiser of PGAM's Risk Management Unit is responsible to
assure that the valuation process provides objective and accurate
market value estimates. American Appraisal Associates (the "Appraisal
Management Firm"), an entity not affiliated with Prudential, has been
appointed by PGAM to assist the Chief Real Estate Appraiser in
maintaining and monitoring the objectivity and
B10-Real Property
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF
PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
For Years Ended December 31, 2000, 1999, and 1998
accuracy of the appraisal process. The Appraisal Management Firm,
under the supervision of the Chief Real Estate Appraiser, approves the
selection and scheduling of external appraisals; engages all external
appraisers; reviews and provides comments on all external appraisals;
prepares all quarterly update appraisals; assists in developing
policies and procedures; and assists in the evaluation of the
performance and competency of external appraisers, among other
responsibilities.
Effective July 1, 2000, the Chief Real Estate Appraiser retired.
During the third and fourth quarters of 2000, the responsibilities of
the Chief Real Estate Appraiser were performed by another officer of
PGAM, who was advised by an independent real estate valuation
consulting firm. The consulting firm performed valuation review
services in connection with the valuation management activities/work
performed by the Appraisal Management Firm but was not involved in the
determination of estimated market value of real estate investments.
PGAM hired a new Chief Real Estate Appraiser effective February 12,
2001.
The purpose of an appraisal is to estimate the market value of real
estate as of a specific date. Market value has been defined as the
most probable price for which the appraised real estate will sell in a
competitive market under all conditions requisite for a fair sale,
with the buyer and seller each acting prudently, knowledgeably, and
for self interest, and assuming that neither is under undue duress.
The estimate of market value generally is a correlation of three
approaches, all of which require the exercise of subjective judgment.
The three approaches are: (1) current cost of reproducing the real
estate less deterioration and functional and economic obsolescence;
(2) discounting of a series of income streams and reversion at a
specified yield or by directly capitalizing a single year income
estimate by an appropriate factor; and (3) value indicated by recent
sales of comparable properties in the market. In the reconciliation of
these three approaches, the one most heavily relied upon is the one
then recognized as the most appropriate by the independent appraiser
for the type of real estate in the market.
Real estate partnerships are valued at the Partnership's equity in net
assets as reflected in the partnership's financial statements with
properties valued as described above.
The market value of real estate and real estate partnerships does not
reflect transaction costs which may be incurred at disposition.
As described above, the estimated market value of real estate and real
estate related assets is determined through an appraisal process.
These estimated market values may vary significantly from the prices
at which the real estate investments would sell since market prices of
real estate investments can only be determined by negotiation between
a willing buyer and seller. Although the estimated market values
represent subjective estimates, management believes these estimated
market values are reasonable approximations of market prices and the
aggregate value of investments in real estate is fairly presented as
of December 31, 2000 and 1999.
C: Investment in Real Estate Investment Trusts - Shares of real estate
investment trusts (REITs) are generally valued at their quoted market
price. These values may be adjusted for discounts relating to
restrictions, if any, on the future sale of these shares, such as
lockout periods or limitations on the number of shares which may be
sold in a given time period. Any such discounts are determined by the
Chief Real Estate Appraiser. On March 30, 1999, the Partnership
converted
B11-Real Property
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF
PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
For Years Ended December 31, 2000, 1999, and 1998
506,894 shares of Meridian REIT to 557,583 shares of ProLogis REIT,
with a fair value of $10.9 million, and cash of $1.0 million (or total
fair value of $11.9 million) as a result of ProLogis' acquisition of
Meridian Industrial Trust. Management continued applying a 3% discount
to the market value of the ProLogis REIT shares through June 29, 1999
because of the restriction which limits the number of shares that can
be publicly traded during any six month period to 30% of the total
shares originally acquired. The application of the 3% discount was
discontinued on June 30, 1999 because this restriction no longer
applied.
D: Revenue Recognition - Rent from real estate is recognized when billed.
Revenue from certain real estate investments is net of all or a
portion of related real estate expenses and taxes, as lease
arrangements vary as to responsibility for payment of these expenses
between tenants and the Partnership. Since real estate is stated at
estimated market value, net income is not reduced by depreciation or
amortization expense. Dividend income is accrued at the ex-dividend
date.
E: Equity in Income of Real Estate Partnership - Equity in income from
real estate partnership operations represents the Partnership's share
of the current year's partnership income as provided for under the
terms of the partnership agreements. As is the case with wholly-owned
real estate, partnership net income is not reduced by depreciation or
amortization expense. Frequency of distribution of income is
determined by formal agreements or by the executive committees of the
partnerships.
F: Mortgage Loan Payable - Mortgage loan payable is stated at the
principal amount of the obligation outstanding.
G: Cash and Cash Equivalents - For purposes of the Consolidated
Statements of Cash Flows, all short-term investments with an original
maturity of three months or less are considered to be cash
equivalents.
Cash of $79,300 and $72,861 at December 31, 2000 and 1999,
respectively, was maintained by the properties for tenant security
deposits and is included in Other Assets on the Consolidated
Statements of Assets and Liabilities.
H: Marketable Securities - Marketable securities are highly liquid
investments with maturities of more than three months when purchased
and are carried at estimated market value.
I: Federal Income Taxes - The Partnership is not a taxable entity under
the provisions of the Internal Revenue Code. The income and capital
gains and losses of the Partnership are attributed, for federal income
tax purposes, to the Partners in the Partnership. The Partnership may
be subject to state and local taxes in jurisdictions in which it
operates.
J: Management's Use of Estimates in the Financial Statements - The
preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those
estimates.
B12-Real Property
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF
PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
For Years Ended December 31, 2000, 1999, and 1998
Note 3: Real Estate Partnership
Real estate partnership is valued at the Partnership's equity in net assets as
reflected by the partnership's financial statements with properties valued as
indicated in Note 2B above. The partnership's financial position at December 31,
2000 and 1999, and results of operations for the years ended December 31, 2000,
1999, and 1998 are summarized as follows:
December 31,
---------------------------
2000 1999
----------- -----------
Partnership Assets and Liabilities
Real Estate at estimated market value $27,080,000 $26,350,000
Other Assets 1,470,801 1,685,059
----------- -----------
Total Assets 28,550,801 28,035,059
----------- -----------
Mortgage loans payable 20,669,422 20,889,782
Other Liabilities 665,365 1,250,146
----------- -----------
Total Liabilities 21,334,787 22,139,928
----------- -----------
Net Assets $ 7,216,014 $ 5,895,131
=========== ===========
Partnership's Share of Net Assets $ 5,445,528 $ 4,506,257
=========== ===========
Year Ended December 31,
-------------------------------
2000 1999 1998
---------- -------- -------
Partnership Operations
Rental Revenue $4,223,801 $926,283 $33,462
Real Estate Expenses and Taxes 3,292,500 795,115 0
---------- -------- -------
Net Investment Income $931,301 $131,168 $33,462
========== ======== =======
Partnership's Share of Net Investment Income $ 791,596 $ 98,375 $33,462
========== ======== =======
Note 4: Debt
The mortgage loan has a variable interest rate which is adjusted annually. The
rate is equal to the 6-month Treasury rate plus 1.565%. It is subject to a
maximum of 11.345% and a minimum of 2.345%. The change from year to year may not
be more than 2%. At December 31, 2000 and 1999, the rate was 7.915% and 6.845%,
respectively.
B13-Real Property
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF
PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
For Years Ended December 31, 2000, 1999, and 1998
As of December 31, 2000, the mortgage loan payable was payable as follows:
As of December 31, 2000, the mortgage loan payable was payable as follows:
Year Ending December 31, (000's)
------------------------------------ -----------------------
2001 $ 83
2002 90
2003 98
2004 104
2005 114
Thereafter 9,603
-----------------------
Total $10,092
=======================
The mortgage payable is secured by a real estate investment with an estimated
market value of $20,500,000.
Based on borrowing rates available to the Partnership at December 31, 2000 for
loans with similar terms and average maturities, the carrying value of the
Partnership's mortgage on the consolidated partnership approximates its
estimated fair value. Different assumptions or changes in future market
conditions could significantly affect estimated market value.
Note 5: Leasing Activity
The Partnership leases space to tenants under various operating lease
agreements. These agreements, without giving effect to renewal options, have
expiration dates ranging from 2001 to 2010. At December 31, 2000, the aggregate
future minimum base rental payments under non-cancelable operating leases by
year and in the aggregate are as follows:
Year Ending December 31, (000's)
------------------------------------ -----------------------
2001 $ 9,189
2002 8,200
2003 5,683
2004 3,923
2005 3,447
Thereafter 11,683
-----------------------
Total $42,125
=======================
The above future minimum base rental payments exclude residential lease
agreements which accounted for 33% of the Partnership's 2000 annual rental
income.
B14-Real Property
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF
PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
For Years Ended December 31, 2000, 1999, and 1998
Note 6: Commitment From Partner
In 1986, Prudential committed to fund up to $100 million to enable the
Partnership to acquire real estate investments. Contributions to the Partnership
under this commitment are utilized for property acquisitions, and returned to
Prudential on an ongoing basis from contract owners' net contributions and other
available cash. The amount of the commitment is reduced by $10 million for every
$100 million in current value net assets of the Partnership. Thus, with $200
million in net assets, the commitment has been automatically reduced to $80
million. As of December 31, 2000, Prudential's equity interest in the
Partnership under this commitment was $44 million. Prudential does not intend to
make contributions during the 2001 fiscal year and will begin to phase out this
commitment over the next several years.
Note 7: Related Party Transactions
Pursuant to an investment management agreement, Prudential charges the
Partnership a daily investment management fee at an annual rate of 1.25% of the
average daily gross asset valuation of the Partnership. For the years ended
December 31, 2000, 1999 and 1998 management fees incurred by the Partnership
were $2.7 million; $2.7 million; and $2.9 million, respectively.
The Partnership also reimburses Prudential for certain administrative services
rendered by Prudential. The amounts incurred for the years ended December 31,
2000, 1999 and 1998 were $116,630; $116,463; and $116,128, respectively, and are
classified as administrative expenses in the Consolidated Statements of
Operations.
On June 28, 2000, the Partnership made an $8 million distribution to the
Partners. On November 30, 2000, the Partnership made an additional $14 million
distribution to the Partners.
During 1999, distributions were made to the Partners of $30 million on February
1, 1999 and $6 million on December 23, 1999.
Note 8: Impact of Recently-Issued Accounting Standards
In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133, Accounting for Derivative Instruments and Hedging Activities ("FASB No.
133"). FASB No. 133 is effective for all fiscal quarters of all fiscal years
beginning after June 15, 1999. In June 1999, the FASB delayed the implementation
date of FASB No. 133 by one year (January 1, 2001 for the Partnership). FASB No.
133 requires that all derivative instruments including certain embedded
derivatives, be recorded on the balance sheet at their fair value. Changes in
the fair value of derivatives are recorded each period in current earnings or
other comprehensive income, depending on whether a derivative is designated as
part of a hedge transaction and, if it is, the type of hedge transaction.
Management of the Partnership has determined that, due to its limited use of
derivative instruments, the adoption of FASB No.133 will not have a significant
effect on the Partnership's financial position at January 1, 2001, nor is it
expected to materially impact future results of operations.
Note 9: Subsequent Events
On February 15, 2001, the Partnership purchased a joint venture interest in an
apartment portfolio located in Gresham, Oregon for a purchase price of $8.6
million.
B15-Real Property
Report of Independent Accountants
To the Partners of The Prudential
Variable Contract Real Property Partnership:
In our opinion, the accompanying consolidated statements of assets and
liabilities, including the schedule of investments, and the related consolidated
statements of operations, of changes in net assets and of cash flows present
fairly, in all material respects, the financial position of The Prudential
Variable Contract Real Property Partnership (the "Partnership") at December 31,
2000 and 1999, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 2000 in conformity with
accounting principles generally accepted in the United States of America. These
financial statements are the responsibility of the management of The Prudential
Insurance Company of America; our responsibility is to express an opinion on
these financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
New York, New York
February 28, 2001
B16-Real Property
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Registrant, in connection with certain affiliates, maintains various
insurance coverages under which the underwriter and certain affiliated persons
may be insured against liability which may be incurred in such capacity, subject
to the terms, conditions, and exclusions of the insurance policies.
Arizona, being the state of organization of Pruco Life Insurance Company ("Pruco
Life"), permits entities organized under its jurisdiction to indemnify directors
and officers with certain limitations. The relevant provisions of Arizona law
permitting indemnification can be found in Section 10-850 et seq. of the Arizona
Statutes Annotated. The text of Pruco Life's By-law, Article VIII, which relates
to indemnification of officers and directors, is incorporated by reference to
Exhibit 3(ii) to its Form 10-Q, SEC File No. 33-37587, filed August 15, 1997.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 (the "Act") may be permitted to directors, officers and controlling persons
of the Registrant pursuant to the foregoing provisions or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
ITEM 15. NOT APPLICABLE
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
(1A) Distribution Agreement between Pruco Incorporated by reference to
Securities Corporation and Pruco Life Post-Effective Amendment No. 14 to Form
Insurance Company with respect to the S-6, Registration Statement No. 2-80513,
Pruco Life Variable Insurance Account. filed March 1, 1990, on behalf of the
Pruco Life Variable Insurance Account.
(1B) Distribution Agreement between Pruco Incorporated by reference to Form S-6,
Securities Corporation and Pruco Life Registration Statement No. 2-89558, filed
Insurance Company with respect to the February 21, 1984, on behalf of the Pruco
Pruco Life Variable Appreciable Account. Life Variable Appreciable Account.
(1C) Distribution Agreement between Pruco Incorporated by reference to Form S-1,
Securities Corporation and Pruco Life Registration No. 33-86780, filed April 9,
Insurance Company with respect to the 1997, on behalf of the Pruco Life Variable
Pruco Life Single Premium Variable Life Contract Real Property Account.
Account and Pruco Life Single Premium
Variable Annuity Account.
(3A) Articles of Incorporation of Pruco Incorporated by reference to Form S-6,
Life Insurance Company, as amended October Registration No. 333-07451, filed July 2,
19, 1993. 1996, on behalf of the Pruco Life Variable
Appreciable Account.
(3B) By-Laws of Pruco Life Insurance Incorporated by reference to Form 10-Q,
Company, as amended May 6, 1997. Registration No. 033-37587, filed August
15, 1997, on behalf of the Pruco Life
Insurance Company.
(3C) Resolution of the Board of Directors Incorporated by reference to Form S-1,
establishing Pruco Life Variable Contract Registration No. 33-86780, filed April 9,
Real Property Account. 1997, on behalf of the Pruco Life Variable
Contract Real Property Account.
II-2
(4A) Variable Life Insurance Contract. Incorporated by reference to Pre-Effective
Amendment No. 1 to Form S-6, Registration
Statement No. 2-80513, filed February 17,
1983, on behalf of the Pruco Life Variable
Insurance Account.
(4B)(i) Revised Variable Appreciable Life Incorporated by reference to
Insurance Contract with fixed death benefit. Post-Effective Amendment No. 5 to Form
S-6, Registration Statement No. 2-89558,
filed July 10, 1986, on behalf of the
Pruco Life Variable Appreciable Account.
(4B)(ii) Revised Variable Appreciable Life Incorporated by reference to
Insurance Contract with variable death Post-Effective Amendment No. 5 to Form
benefit. S-6, Registration Statement No. 2-89558,
filed July 10, 1986, on behalf of the
Pruco Life Variable Appreciable Account.
(4C) Single Premium Variable Annuity Incorporated by reference to Form S-1,
Contract. Registration No. 33-86780, filed April 9,
1997, on behalf of the Pruco Life Variable
Contract Real Property Account.
(4D) Flexible Premium Variable Life Incorporated by reference to Form S-1,
Insurance Contract. Registration No. 33-86780, filed April 9,
1997, on behalf of the Pruco Life Variable
Contract Real Property Account.
(5) Opinion and Consent of Clifford E. Filed herewith.
Kirsch, Esq. as to the legality of the
securities being registered.
(10A) Investment Management Agreement Incorporated by reference to Form 10-K,
between The Prudential Insurance Company Registration No. 33-08698, filed May 2,
of America and The Prudential Variable 1988 on behalf of the Pruco Life Variable
Contract Real Property Partnership. Contract Real Property Account.
(10B) Service Agreement between The Incorporated by reference to Form 10-K,
Prudential Insurance Company of America Registration No. 33-08698, filed September
and The Prudential Investment Corporation. 12, 1986 on behalf of the Pruco Life
Variable Contract Real Property Account.
(10C) Partnership Agreement of The Incorporated by reference to Form 10-K,
Prudential Variable Contract Real Property Registration No. 33-08698, filed May 2,
Partnership. 1988 on behalf of the Pruco Life Variable
contract Real Property Account.
(22) Subsidiary Organizational Chart. Incorporated by reference to Form S-1,
Registration No. 33-86780, filed April 9,
1997, on behalf of the Pruco Life Variable
Contract Real Property Account.
(23A) Written consent of Pricewaterhouse- Filed herewith.
Coopers LLP, independent accountants.
(23B) Written consent of Clifford E. Incorporated by reference to Exhibit (5)
Kirsch, Esq. hereto.
II-3
(24) Powers of Attorney:
(A) Ira J. Kleinman, Esther H. Milnes, I. Incorporated by reference to Form 10-K,
Edward Price Registration No. 33-86780, filed March 31,
1997 on behalf of the Pruco Life Variable
Contract Real Property Account.
Incorporated by reference to
(B) J. Avery Post-Effective Amendment No. 2 to Form
S-6, Registration No. 333-07451, filed
June 25, 1997 on behalf of the Pruco Life
Variable Appreciable Account.
Incorporated by reference to
(C) K. Sakaguchi Post-Effective Amendment No. 8 to Form
S-6, Registration No. 33-49994, filed
April 28, 1997 on behalf of the Pruco Life
PRUvider Variable Appreciable Account.
(D) David R. Odenath, Jr., William J. Incorporated by reference to Form N-4,
Eckert, IV, Ronald P. Joelson Registration No. 333-52754, filed on
December 26, 2000 on behalf of the Pruco
Life Flexible Premium Variable Annuity
Account.
(27) Financial Data Schedule for The Filed herewith.
Prudential Variable Contract Real
Property Partnership.
(b) Financial Statement Schedules
Schedule III-Real Estate Owned by The Filed herewith.
Prudential Variable Contract Real Property
Partnership and independent accountant's
report thereon.
ITEM 17. UNDERTAKINGS
Subject to the terms and conditions of Section 15(d) of the Securities Exchange
Act of 1934, the undersigned Registrant hereby undertakes to file with the
Securities and Exchange Commission such supplementary and periodic information,
documents and reports as may be prescribed by any rule or regulation of the
Commission heretofore or hereafter duly adopted pursuant to authority conferred
in that Section.
The undersigned Registrant hereby undertakes (a) to file any prospectuses
required by Section 10(a)(3) of the Securities Act of 1933 as Post-Effective
Amendments to this Registration Statement, (b) that for the purposes of
determining any liability under the 1933 Act, each such Post-Effective Amendment
may be deemed to be a new Registration Statement relating to the securities
offered therein and the offering of such securities at that time may be deemed
to be in the initial bona fide offering thereof, (c) to reflect in the
prospectus any facts or events after the effective date of the registration
statement (or the most recent Post-Effective Amendment thereof) which,
individually or in the aggregate, represent a fundamental change in the
information set forth in the registration statement, (d) to include any material
information with respect to the plan of distribution not previously disclosed in
the registration statement or any material change to such information in the
registration statement, (e) to remove from registration by means of a
Post-Effective Amendment any of the securities being registered which remain
unsold at such time as the offering of such securities may be terminated.
II-4
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Pruco Life Insurance
Company has duly caused this Post-Effective Amendment No. 8 to the Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Newark, State of New Jersey, on the 6th day of April,
2001.
Pruco Life Insurance Company
In Respect of
Pruco Life
Variable Contract Real Property Account
By: /s/ Esther H. Milnes
--------------------------------
Esther H. Milnes
President
Pursuant to the requirements of the Securities Act of 1933, this Post-Effective
Amendment No. 8 to the Registration Statement has been signed below by the
following Directors and Officers of Pruco Life Insurance Company in the
capacities indicated on this 6th day of April, 2001.
Signature and Title
-------------------
/s/ *
- --------------------------------
Esther H. Milnes
President and Director
/s/ *
- --------------------------------
William J. Eckert, IV
Vice President and Chief Accounting Officer
/s/ *
- --------------------------------
James J. Avery, Jr.
Director *By: /s/ Thomas C. Castano
---------------------------------
Thomas C. Castano
/s/ * (Attorney-in-Fact)
- --------------------------------
Ronald P. Joelson
Director
/s/ *
- --------------------------------
Ira J. Kleinman
Director
/s/ *
- --------------------------------
David R. Odenath, Jr.
Director
/s/ *
- --------------------------------
I. Edward Price
Director
/s/ *
- --------------------------------
Kiyofumi Sakaguchi
Director
II-5
EXHIBIT INDEX
(a) (5) Opinion and Consent of Clifford E. Kirsch, Esq. as to the legality of
the securities being registered.
(23A) Written consent of PricewaterhouseCoopers LLP, independent
accountants.
(b) Financial Statement Schedules
Schedule III-Real Estate Owned by The Prudential Variable Contract Real
Property Partnership and independent accountant's report thereon.
II-6